Mt. Gox Settlement: How the Payouts Could Impact Bitcoin Prices

The catastrophe that was the Mt. Gox hack made headlines back in 2014. It was a devastating blow for many investors, who saw their life savings vanish overnight as over 800,000 bitcoins were stolen from the exchange. The aftershock rocked the crypto industry and sent prices plunging as fear and uncertainty spread.

Eight years later, Mt. Gox is in the news again — good news, that is. The failed BTC exchange has announced plans to return creditor assets, or at least some of them. 

So, what happens when Mt. Gox starts returning BTC to creditors? Will the beneficiaries offload their reclaimed BTC all at once? Will this reparation torpedo the price of BTC, or will its impact be negligible?

Let's look at the possible scenarios in the aftermath of the Mt. Gox settlement — and what those could mean for BTC.

What Is Mt. Gox?

Mt. Gox is a Tokyo-based cryptocurrency exchange founded in 2010 by Jed McCaleb, an American programmer.

McCaleb initially built the website that became the Mt. Gox exchange as a platform for players of the card game Magic: The Gathering to swap cards online. As cryptocurrencies became popular, the site switched to acting as a platform for exchanging Bitcoin and other cryptocurrencies. 

Interestingly, the name “Mt. Gox” is actually an acronym for “Magic: The Gathering Online Exchange.” In 2011, Mark Karpeles, a French developer, bought the exchange for six months' worth of revenue, becoming its largest shareholder and CEO. 

At its peak in 2013, the now defunct exchange handled about 70% of all BTC trading volume, and was considered the largest Bitcoin exchange globally. 

Given its prominence in the market, it wasn't long before the Mt. Gox exchange became a target for hackers. From 2011 to 2014, the exchange experienced several security issues, culminating in the theft of 650,000–850,000 BTC in February 2014.

That same year, Mt. Gox shut down its website and filed for bankruptcy. 

So, what happened to Mt. Gox?

The Mt. Gox Hack

On February 7, 2014, Mt. Gox stopped all Bitcoin withdrawals on the platform, stating that the temporary freeze was a mere pause in withdrawal requests "to obtain a clear technical view of the current processes."

A few days later, the company issued a statement blaming the downtime on transaction malleability, a bug common with the Bitcoin code that makes it possible for bad actors to change transaction details. The defect made otherwise successful transactions appear as if they’d failed — a setup for scammers to get double paid. 

Meanwhile, on the Mt. Gox exchange, Bitcoin was trading at prices below $200 (instead of the market price of about $418) and traders feared the worst: Loss of funds due to the possible bankruptcy of Mt. Gox.

Days turned into weeks, and still the "temporary freeze” remained in place, triggering speculation and uncertainty. Finally, on February 24, 2014, the exchange stopped all trading on the platform and shut down the website.

In the days that followed, a leaked company document revealed that hackers had stolen 744,408 bitcoins belonging to Mt. Gox customers, and an additional 100,000 bitcoins belonging to the company. The leak insinuated that the aforementioned transaction malleability glitch was to be blamed for the looting of Mt. Gox Bitcoin reserves from active accounts and cold storages. The massive theft resulted in the exchange’s insolvency.

As Mt. Gox's website went offline, the price of Bitcoin slipped by as much as 23%, and the following ripple effect plunged the price of crypto to new lows.

How did this happen?

The Hack Explained

While the wheels fell off in February 2014, preliminary investigations indicated that hacking activities on Mt. Gox had been going on since 2011. 

In June 2011, the company experienced the first of its many security breaches when hackers managed to access the company's auditor's computer and changed the Bitcoin price to $0.01 each. Bitcoin was trading at around $30 at the time. Then, using the private hot wallet keys (which provide access to digital assets) of Mt. Gox customers, the hackers bought over 2,000 bitcoins at this spurious price.

To make matters worse, Mt. Gox customers also bought 650 bitcoins at this manipulated price.

This early hacking incident prompted Mt. Gox to tighten security. However, the upgraded security couldn't stop the raid on the exchange.

Further investigations in the aftermath of the February 2014 debacle revealed that Mt. Gox’s unencrypted private key had been stolen back in 2011. However, it was unclear if the data compromise was due to a hacking attack or carried out with an insider's help.

With access to Mt. Gox's private key, criminals proceeded to move customers' BTC over the years. Bizarrely, the exchange was unaware of the sustained skimming of the digital assets in their custody.

It's believed the Mt. Gox system didn't view the transactions as suspicious but, rather, as customer-induced transfers to more secure wallet addresses.

But there was more to the Mt. Gox saga than the hack.

A Disorganized Company 

The Mt. Gox exchange had technically been insolvent for at least two years before the knowledge of the hack and BTC theft was made public. Although they had been operational, they claimed to be unaware of the BTC drain.

Some analysts believe that about 80,000 BTC were already missing even before Mark Karpeles bought the exchange in 2011. By Q2 of 2013, the exchange had already lost most of its Bitcoin, although it still maintained its position as the world's third largest and most popular Bitcoin exchange.

The fact that nobody in the company was aware of these events points to gross mismanagement and poor organization.

For instance, employees claimed that only Mark Karpeles could approve any changes to Mt. Gox's website's source code — matters he paid scant attention to, meaning critical security updates and bug fixes could take weeks to complete.

Circumstantial evidence points to a combination of gross incompetence and criminal intent on the part of Mark Karpeles for the Mt. Gox cataclysmic failure. But after his arrest and subsequent prosecution, the Tokyo District Court found him guilty only of falsely inflating Mt. Gox's holdings through data manipulation.

The court acquitted him of the weightier charges, like embezzlement and breach of trust, believing that Karpeles acted without ill intent. In March 2019, Karpeles was sentenced to a 30-month prison term, suspended for four years — meaning he wouldn't have to serve time if he stayed out of trouble for four years from the time of sentencing.

Aftermath

Mt. Gox filed for bankruptcy on February 28, 2014 in Japan, and two weeks later in the U.S. What followed was a flurry of legal troubles, with several creditors initiating class action lawsuits against the exchange.

Not long after, Mt. Gox claimed it had found 200,000 bitcoins in old-format digital wallets it had been using before June 2011. The company promised to distribute the BTC to the victims of the hack. However, since the company was under bankruptcy protection, the fund has since been held in trust for the creditors.

Toward the end of 2021, the Tokyo District Court reached an agreement with creditors on the Mt. Gox rehabilitation plan, bringing nearly eight years of legal battle to a close.

The Proposed Mt. Gox BTC Rehabilitation Plan

In October 2021, Mt. Gox announced a rehabilitation plan to return a portion of recovered BTC to investors who had lost their assets in the infamous Mt. Gox hack. Nobuaki Kobayashi, the court-appointed Rehabilitation Trustee, issued an official document spelling out the rehabilitation process and instructions for victims to claim and recover their BTC.

The distribution of assets to customers of the defunct Mt. Gox exchange will start by 2023. The reparation will target around 10,000 customers globally, and the trustee has set the deadline for submitting claims with the necessary information (selection and registration) as January 10, 2023, Japan time.

According to the official letter, dated October 6, 2022, creditors must first register on the system to carry out the aforementioned selection and registration. Creditors will require a code for this mandatory initial registration. A detailed guideline on the processes can be accessed here. 

As part of the final process, creditors are expected to visit the MTGOX Online Rehabilitation Claim Filing System to register payee information and select a payment method from four options. While all creditors will receive a base payment, they're given flexibility when it comes to receiving the remainder of their deserved funds. These include early lump-sum repayment, repayment by bank remittance, repayment for a portion of cryptocurrency rehabilitation claims in cryptocurrency and repayment through a fund transfer service provider.

How the Mt. Gox Settlement Could Affect BTC Prices

Although news of the Mt. Gox settlement offers consolation for Mt. Gox customers, some industry analysts fear that sales generated from a significant portion of such a massive stash of refunded Bitcoin in the market may lead to undesirable consequences for Bitcoin and the crypto market in general. 

According to the rehabilitation plan, the total amounts to be returned to the Mt. Gox hacking victims are 141,686 Bitcoin (BTC) and 142,846 Bitcoin Cash (BCH). While this may seem minute compared to the BTC daily trading volume of $16.2 billion, the usual FUD (fear, uncertainty and doubt) in such scenarios often triggers a much larger market movement.

Depending on the possible scenarios that may unfold following the execution of the Mt. Gox rehabilitation, savvy investors and traders can cash in on this important crypto event if they bet correctly. Let's explore the possible outcomes in detail.

Worst Case Scenario: Creditors Liquidate All Holdings

Let’s say the Mt. Gox creditors are settled at about the same time, and (theoretically) they all decide to sell off their BTC holdings (a sizable 16% of the total daily BTC trading volume of $16.3 billion as of Oct. 9, 2022).

How Would the Market React?

This sudden influx could create sell pressure on BTC, forcing the price to potentially decline significantly. Take into consideration the already depressed Bitcoin market, and the possibility of a price tumble is realistic. Mt. Gox victims, spooked by the ongoing Bitcoin and crypto volatility, may opt to sell their reclaimed BTC, triggering more market turbulence.

However, even in a crisis, opportunities are ever present. Investors can short BTC and gain off the possible plunge in its price.

Are you confident that the rehabilitation plan will trigger a slump in BTC prices? If you are, here's how to profit through the short-selling route on Bybit.

How to Short-Sell BTC on Bybit

Follow these simple steps to short BTC on Bybit.

Step 1: Log in to your Bybit account and transfer funds to your Derivatives account 

• Click on Assets on the top right 

• Select Derivatives from the drop-down menu 

• Deposit the funds you want to trade with from other wallets, such as funding or spots

Step 2: Select your contract type

• Choose from either USDT Perpetual, Inverse Perpetual or Inverse Futures

Step 3: Choose trading pairs

• Select trading pairs 

• Click on BTCUSDT

Step 4: Enter your Order Details

• Select Margin: Isolated (Isolated or Cross)

• Select Leverage of 2x (up to 100x)

• Select Limit as the type of order (Limit, Market or Conditional) 

• Select Order Price, and key in your amount 

• Select Order Quantity and input the quantity of BTC you want to short

• Select Sell Short with TP/SL

• Input Take Profit trigger price, which should be lower than the order price

• Input the Stop Loss trigger price, which should be higher than the order price

• Select Open Short

You have now placed your short-sell order. If BTC’s price drops to meet your Take Profit price, your position will automatically be closed and you’ll have made a profit. If, on the other hand, the price rises to meet your Stop Loss, your position will automatically be closed at a loss.

Best Case Scenario: BTC Holds Support as Creditors HODL On

The opposite scenario is a possibility: BTC prices retain support (and even rise) in the long term, as beneficiaries of the BTC rehabilitation plan decide to HODL. Most industry watchers believe this scenario to be more likely — because most creditors wouldn’t want to sell off their reclaimed BTC in a hurry. Analysts believe these creditors to be hard-core Bitcoin enthusiasts who are some of the earliest adopters of Bitcoin, and are thus more likely to HODL.

Another factor supporting the forecast of a minimal impact of the rehabilitation plan is the rehabilitation debtor's offer of different payment payout plans. Again, the payout process is expected to take several months, reducing the possibility of mass dumping of BTC into the market that could cause further volatility. 

In this case, it would be prudent to go long on BTC.

How to Buy BTC on Bybit

Buying BTC on Bybit can be done in a few simple steps.

Step 1: Log in to your Bybit account and fund your Spot account 

• Buy USDT on the Bybit Fiat Gateway with the fiat currency of your choice

• Fund your spot account

Step 2: Choose trading pairs

• Hover over Spot Trading from the Trade drop-down menu on the top left

• Select the BTC/USDT pair

Step 3: Enter your Order Details

• Select either Market, Limit or Conditional order

• Enter your order price and quantity

• Confirm your order details

Step 4: Click Buy on BTC to conclude the trade

Final Words

The proposed rehabilitation plan for victims of the Mt. Gox hack and its impact on the price movement of BTC has been the subject of intense speculation. The proposed Mt. Gox settlement has triggered concerns that such a large amount of BTC entering the market at the same time could cause a significant dip in BTC’s price.

Of course, creditors selling off their reclaimed tokens all at once could trigger some negative price movement. But this is unlikely, since the payments won’t happen at the same time, according to the scheme set out in the rehabilitation plan.

Furthermore, many former Mt. Gox customers are less likely to sell, being staunch believers and early adopters of the digital asset. These speculations dispel the likelihood of the Mt. Gox rehabilitation plan tanking BTC prices and unsettling the market.