BANKRUPT

The collapse of Mt. Gox was Bitcoin’s darkest day, an event that has cast a long shadow over the industry and whose trauma can still be felt today. Any time a centralised exchange collapses, it draws comparisons with the time when Bitcoin’s dominant exchange and the primary source of most of the market’s trading volume imploded.

At its zenith, Mt. Gox was more than an exchange; it was the market itself. But the stranglehold it held over global Bitcoin trading also made it a single point of failure. This failure in February 2014, with liabilities cited at $473 million and approximately 850,000 bitcoins vanished, was a cataclysm that nearly extinguished the nascent promise of Bitcoin.

In 2010, future Ripple founder Jed McCaleb had transformed Mt. Gox from a Magic: The Gathering trading card platform into a Bitcoin exchange as his interest in digital currency deepened. Less than a year later, he sold the exchange to Mark Karpelès, a French programmer and Bitcoin enthusiast living in Japan.

“I created Mt. Gox in the two weeks after I first read about Bitcoin,” recounts Jed McCaleb. “I made it because I was super excited about the potential of Bitcoin, I wanted to play around with the system, and it really seemed like the community needed an exchange. I never really intended to have it become my full time thing.

“But shortly after it was launched it started to get a lot of use and was growing rapidly. So I looked for someone to take it over that could devote more time to it. At that point the Bitcoin world was very small so there weren't that many options for people to take it over. I unfortunately chose to give it to Mark who ended up being extremely incompetent. I had some contact with him afterwards but he would never really listen to my advice. It was painful to watch him botch the whole thing.”

In January 2011, just before the sale was finalised, a hacker had breached the exchange's servers and stolen approximately 80,000 BTC from its hot wallet. There is clear evidence that there were holes in the ship from the very start, and as the leaks intensified under Karpelès’ command, there reached a point at which the water couldn’t be bailed fast enough to keep it afloat.

On the surface, though, everything looked shipshape as Mt. Gox experienced meteoric growth under Karpelès. By 2014, it was capturing as much as 90% of all Bitcoin trading volume globally. The exchange had become the central clearinghouse for the entire Bitcoin economy. But what the world saw as a titan of a new financial era was, in reality, a hollowed-out shell, its public success masking an ever-deepening insolvency.

Goxxed It

The exchange was a reflection of its CEO, Mark Karpelès, a talented programmer who was catastrophically out of his depth, presiding over a chaotic organisation that was wholly unprepared for the immense responsibility it held. The narrative that Mt. Gox was brought down by sophisticated hackers, therefore, does not hold water. In truth, it was an unlocked shop with the keys left in the door, repeatedly plundered because no one was minding the store.

One former employee described Karpelès as someone who was “definitely in over his head” and viewed the exchange as a role-playing game, failing to grasp that the numbers on his screen represented real people's life savings. At one point, customer money and company operating capital were held in a single, personal bank account belonging to Mark Karpelès.

The primary cause of Mt. Gox's losses was a long-term, clandestine theft that began in late 2011. Attackers gained access to the private keys of Mt. Gox's hot wallet, granting them unrestricted access to the exchange's operational funds. Over the following two years, they methodically siphoned bitcoins in relatively small amounts – often a few hundred BTC at a time – which allowed them to fly under the radar. Due to Mt. Gox's complete lack of accounting reconciliation and internal controls, these unauthorised outflows went entirely unnoticed.

For more than six months before its final collapse, the exchange was a zombie, a hollowed-out entity processing trades on an internal ledger that had become dangerously disconnected from the reality of its empty wallets. The bitcoins that users thought they were buying and selling were simply not in the exchange's possession.

Kim Nilsson is the Chief Engineer at WizSec, the Tokyo-based Bitcoin security firm that conducted an independent investigation into Mt. Gox’s missing coins. His “Cracking Mt. Gox” report detailed how hackers siphoned coins via a long-term theft and even identified suspects, influencing law enforcement.

He recounts: “The breakthrough moment was when I then traced where all those coins went and discovered that not only were they going to the same wallets but those wallets also received coins from several other well-known thefts. Suddenly it wasn't just some random hacker that got lucky but I was on the trail of a serious criminal enterprise laundering stolen coins from all over the place.”

On February 7, 2014, Mt. Gox abruptly halted all Bitcoin withdrawals, blaming a bug in the Bitcoin protocol. The disingenuous announcement caused confusion and panic, and by February 17, with no resolution, protests began outside the company's Tokyo headquarters. On February 24, by which time Mark Karpelès had withdrawn from the board of the Bitcoin Foundation, the exchange ceased trading altogether. Four days later, it filed for bankruptcy. And that’s when things got really messy.