The 10-year-old cryptocurrency exchange hack is shaking Bitcoin

Mt. Gox, the once-world's top cryptocurrency exchange, has begun paying Bitcoin to victims of its 2014 hack, sending the price of the coin plunging amid fears of a sell-off.

At its peak 10 years ago, Mt. Gox handled more than 70 percent of all Bitcoin and other digital currency trading. But in February 2014, the exchange announced it was shutting down, citing the loss of 750,000 customer Bitcoins and 100,000 company Bitcoins, worth $500 million then and $46.5 billion today.

After nearly a decade of fighting, CoinLab reached a settlement in January 2021 with Mt. Gox bankruptcy trustee Nobuaki Kobayashi to return funds to users. He is believed to be holding 142,000 Bitcoins, worth $8 billion. The expected payout date is October 2024, but the process is moving forward.

On the morning of July 5, Mt. Gox transferred 47,228 Bitcoins , worth $2.6 billion, from its cold wallet to a new wallet, initiating the refunds to 20,000 users, ending a decade-long wait. However, news of the move triggered a sell-off last week. Bitcoin fell from $63,000 per coin in early July to $53,000 and is now at $55,000.

Illustration of Bitcoin cryptocurrency plummeting. Photo: CoinTelegraph

“A lot of people who had assets stuck in the Mt. Gox bankruptcy are obviously going to cash out,” John Glover, chief investment officer at crypto lender Ledn, told CNBC . “After what happened, they chose to take their money (after being reimbursed for Bitcoin) and run away from the market.”

"While it's good news for Mt. Gox victims, the inevitable sell-off is understandable, and it's understandable that the already volatile market for cryptocurrencies will continue to create anxiety," said James Butterfill, head of research at CoinShares.

JP Morgan analysts also predicted last month that Mt. Gox's compensation holders would soon sell their Bitcoin for a profit, but the volatility would end in July. Similarly, Lennix Lai, chief commercial officer of OKX, sees the Mt. Gox-related sell-off as a short-term concern. "Mt. Gox creditors are mostly long-time Bitcoin enthusiasts, and are unlikely to sell all their Bitcoin immediately," he said.

According to Butterfill, the market also has enough liquidity in case of Bitcoin selling. "The daily trading volume of Bitcoin on the top exchanges is over $8.7 billion, which means the market is fully capable of absorbing the selling pressure," he said.

Therefore, JPMorgan predicts that Bitcoin prices will fall sharply in July, but will start to recover from August.

Echoes of the hack more than 10 years ago

In late 2006, programmer Jed McCaleb thought about building a website where Magic : The Gathering Online players could trade cards. In January 2017, he bought the domain name mtgox.com , but then moved on to other projects because he felt it was "not worth the time."

In 2010, McCaleb read about Bitcoin and realized that the community needed an exchange. In July of that year, he launched the exchange, using the domain name mtgox.com as a subdomain. In March 2011, he sold the website to a French developer living in Japan, Mark Karpelès.

Mark Karpelès, former CEO of Mt. Gox. Photo: Japan Times

Karpelès took Mt. Gox to its peak, processing millions of cryptocurrency transactions. But a cyberattack hit the site, which had been built with poor security, and drained hundreds of thousands of Bitcoins.

According to BitBO , the bankruptcy occurred in February 2014, but Mt. Gox had been hacked for several years. On June 13, 2011, the exchange announced that 25,000 Bitcoins from 478 accounts had been stolen. Six days later, the company experienced a second incident when hackers took over a computer from an Mt. Gox auditor and changed the price of Bitcoin to 1 cent. The hacker bought 2,000 Bitcoins at that price and transferred them before being detected. A few minutes later, the price of Bitcoin returned to its original level. The company claimed that it was "in control" by transferring 424,242 Bitcoins from its cold wallets to the exchange's hot wallets.

In October 2011, Mt. Gox continued to have 20 transactions that were marked "invalid", causing a total of 2,609 Bitcoins to be transferred to an unknown wallet with no private key.

After the attacks and vulnerabilities were discovered, Mt. Gox tightened its security. However, a later investigation found that Mt. Gox's private keys were not encrypted after 2011, allowing another 650 Bitcoins to be stolen, although it is unclear whether the keys were "obtained through an attack or with the help of an insider."

Over the next few years, hackers continued to siphon Bitcoins from Mt. Gox without the exchange knowing. By 2013, amid the company's meteoric rise, they lost nearly all of their Bitcoins. "What's surprising is that they were largely oblivious, despite being insolvent for nearly two years before it became public in 2014," one expert told BitBO .

Before the hack, many Mt. Gox members complained about poor management and lack of organization, but were not recognized, Investor Pedia quoted former employees as saying. One anonymous developer said the company did not even use version control software, which is used to prevent colleagues from accidentally overwriting each other's work if they happen to work on the same file.

Mt. Gox's interface when it was still operating. Photo: Blockonomi

According to US court documents released in June 2023, the attackers were identified as Alexander Verner and Alexey Bilyuchenko, along with several others. In 2011, Verner and Bilyuchenko gained access to Mt. Gox's transaction database and user data. Between then and 2014, they transferred more than 647,000 Bitcoins from Mt. Gox wallets, half to BTC-e, an exchange that was shut down by the FBI in 2017. The rest was transferred to other exchange wallets such as TradeHill, BitInstant.

After Mt. Gox declared bankruptcy due to a long-term hack, Bitcoin plummeted from $1,000 per coin to $600 per coin. By March 2017, when it returned to its old peak, the digital currency had fallen to $200 per coin, causing a "crypto winter" that lasted about three years.

Bao Lam

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