Today, we’re taking a step back in time…
Our first stop is the year 2006…
An online forum called MTG was created for a game called “Magic: The Gathering.” People used it to trade game cards.
Fast-forward to 2010, and there were whispers on the internet about this new internet currency called Bitcoin. It was promising and intriguing.
But, with no exchanges, wallets, or any of the other crypto infrastructure we take for granted today, it seemed unnecessarily complex to many.
Most brushed it off as another internet fad.
But not Jed McCaleb, the founder of the MTG forum. He took a keen interest in Bitcoin.
He even set up an online exchange for people to trade it. He called it Mt. Gox (short for “Magic: The Gathering Online Exchange”). It became the first successful Bitcoin exchange in the world.
At the time, Bitcoin was changing hands for just $1.
Three short years later, Bitcoin hit a peak of $1,000.
By 2014, riding the Bitcoin mania, Mt. Gox became the world’s largest crypto exchange. It was handling 70% of all Bitcoin transactions worldwide.
It was truly the first crypto unicorn… The Magic Exchange.
The Perfect Storm
But unfortunately, the magic didn’t last.
In early 2014, it came to light that a group of hackers had robbed the exchange of its Bitcoin. It did this by changing the unique ID of a Bitcoin transaction before it was confirmed on the Bitcoin network. This is known as transaction malleability.
This led Mt. Gox to believe that certain withdrawals had not happened. And this prompted it to resend requested funds multiple times.
To be clear, transaction malleability was a flaw in Bitcoin itself. The Bitcoin Foundation, a non-profit devoted to the development and promotion of Bitcoin, acknowledged that.
So, in that sense, it wasn’t exactly Mt. Gox’s fault that transactions could be manipulated in this way.
But this fault had been identified in 2011. And other exchanges rendered it harmless with software that accurately reported balances and transactions.
Not Mt. Gox.
By the time Mt. Gox realized the problem, it was too late. The exchange had already lost 850,000 Bitcoins. That was about 4% of the entire Bitcoin supply at the time. It would be worth about $19 billion at today’s prices.
It was a perfect storm of faulty software and management-level neglect.
On February 28, 2014, Mt. Gox filed for bankruptcy and froze withdrawals, leaving its customers high and dry.
Good News for Some…
So, why am I telling you this story now, more than eight years later?
Well, there’s been a new development in this saga recently. And it could have a huge impact on the Bitcoin price.
Out of the initial 850,000 Bitcoins lost by Mt. Gox, only 150,000 have since been recovered.
These were meant to be redistributed to victims. That didn’t happen. So, for seven years, customers fought an epic legal battle with the exchange.
But no one got their hopes up too high.
Then, in November 2021, Mt. Gox released a formal “Rehabilitation Plan” to return lost funds to customers.
And, on July 6, 2022, Mt. Gox and “Rehabilitation Trustee” Nobuaki Kobayashi sent an email to creditors asking for their payment details. It looks like the payout could be as early as next month.
Today, there are 137,891 Bitcoins showing in Mt. Gox’s wallet.
So, some Mt. Gox customers are finally getting their Bitcoin back. That’s great news.
Now, anyone with even a passing interest in cryptos knows that the market has been in turmoil this year.
Recently, I wrote to you about some of the events that caused that turmoil over the past few months – from volatility in so-called “stablecoins” to trouble in crypto lending markets.
And earlier this month, I told you about the bankruptcy of crypto lender Voyager Digital, which affects about $1.3 billion of crypto assets.
The current market value of all cryptos is about $1 trillion. That’s down about 65% from its November 2021 all-time high of about $2.9 trillion.
Unfortunately, though not directly involved in these stories, Bitcoin has suffered by association. The premier cryptocurrency dropped by as much as 60% this year. It’s currently down about 52% year to date.
And so, the Mt. Gox news is concerning for Bitcoin owners. They’re wondering how the reintroduction of nearly 140,000 Bitcoins into the market in one go will affect Bitcoin’s price.
Here’s What Could Happen
Well, I don’t think another Bitcoin crash is in the cards.
I’m not saying it can’t go lower. It could.
And some Mt. Gox customers may decide to cash in now and put the whole saga behind them.
But even if we assume the worst-case scenario of all the Bitcoins currently held in Mt. Gox’s wallet being liquidated, that would represent just under 10% of the total daily exchange volume.
That’s significant… but it wouldn’t overwhelm the market.
But many folks receiving their once-lost coins will probably feel that it doesn’t make sense to sell them right now. They may decide to bide their time and wait for it to recover.
But there’s another reason why I don’t think Bitcoin is going to plummet on this news.
You see, in the intervening years, tired of the legal struggle to regain their Bitcoin holdings, many Mt. Gox creditors sold the rights to their settlements to hedge funds at a discount.
These hedge funds probably paid in the tens of thousands for each Bitcoin during the subsequent rallies.
So I think they are much less likely to sell their Bitcoin right now while it’s trading around $22,000. They’re far more likely to hold on to them until the price bounces back up.
What to Do?
No matter what the current owners of these recovered Bitcoin decide to do, there could be a fair amount of volatility in Bitcoin as this story unfolds.
Some of you may be tempted to sell your Bitcoins. But it’s rarely a good idea to sell into panic. Even – or especially – if it seems like everyone else is doing it.
So, unless you really need the cash, I would just sit this one out.
This past week or so, we’re already seeing the beginning of what could become a rally in Bitcoin.
But whatever happens, as I explained recently, I believe Bitcoin will recover its current losses… and keep powering on over the long term.
Until tomorrow,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins