The Rise and Fall of Mt. Gox

Mt.Gox was once known as the largest cryptocurrency exchange in the industry. Accounting for over 65% of all cryptocurrency trades it was an absolute behemoth. To put it into perspective, the recent FTX collapse only accounted for 10% of cryptocurrency volume.

But with this popularity came unwanted attention which ultimately lead to its unfortunate demise in 2014. Ultimately, this event would permanently scar the industry and leave thousands of investors with lost funds.

In this article, I will be going over all the events leading up to its collapse and much more. So without further ado, let’s jump right in.

The Origin Story

Let’s start by providing some context to Mt.Gox. Launched in 2010 by programmer Jed McCaleb. Initially, the exchange intended to be used to trade Magic: The Gathering cards.

Mt.Gox is essentially an acronym for Magic: The Gathering Online Exchange. Over time the exchange was repurposed as a Bitcoin exchange whereby users could reliably trade cash for a new decentralized digital currency known as Bitcoin.

In 2011 is when the exchange took off with the transfer in ownership from Jed McCaleb to another computer programmer known as Mark Karpeles.

Karpeles a young 26 year old man was an avid Bitcoin enthusiast and went by the name of Magicaltux in online forums. As soon as this notorious figure took over the exchange he began its development on the backend code to help turn it into the eventual behemoth it became.

Ultimately, between 2011 and 2014 Kapeles transferred Mt. Gox into the go-to cryptocurrency exchange until its unfortunate demise. But even before its demise, there were cracks in the system.

The Downfall

To start off, Karpeles was often criticized in his overall development approach. Several flaws were highlighted by previous Mt. Gox employees. Including a lack of test environments and the ability for employees to overwrite colleagues’ code

Not to mention all coding changes had to be passed through him resulting in an inefficient mess.

By the end of 2013, it was also a financial and business mess. Firstly, $5 million in assets were seized for failing to abide by federal and state regulations as they did not register as a money transmitters.

This was further compounded by a $75 million lawsuit by partner CoinLab and the shutting down of the Wells Fargo bank belonging to one of its subsidiaries.

On the customer side, users were having month-long delays in withdrawing from the exchange. Then ultimately everything came it a screeching halt in 2014 with a hack of over 650,000 Bitcoin.

To say this was catastrophic would be an understatement. This represented almost half a billion dollars at the time, accounting for 7% of the total Bitcoin supply.

Thousands of investors were damaged and the reputation of the industry was tarnished for good. Sadly in April of 2014 Mt. Gox filed for bankruptcy and was ordered to liquidate.

But what exactly caused this collapse? 

Unfortunately, the exact cause of the Mt. Gox hack is not publicly known. But there are several theories on the matter.

The most notable was insider fraud with Mt. Gox not having the Bitcoin it claimed. Speculators claim that Kapeles manipulated records to artificially inflate their perceived holdings.

Moreover, it could have also been an individual with onsite access to the cold storage who drained the wallets or perhaps a hacker who exploited a vulnerability in the exchange’s systems.

But at the end of the day, this is all speculation and we will likely never know how the exchange was hacked.

If you want to view this article in a more visual format then please check out my video below:

Final Thoughts

Overall, the fall of Mt. Gox was a major blow to the cryptocurrency industry and has had major ripples even to this day.

Despite the exchange’s demise, the use of cryptocurrency has continued to grow, and new exchanges have emerged to take its place as dominant players in the market. I hope you found this article useful and thanks for reading it.

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