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850,000 bitcoins, worth almost half a billion dollars, vanished without a trace. And Mt. Gox, once the world’s largest bitcoin exchange, collapsed in bankruptcy. Sonofabitchcoin, what happened here?
Mt. Gox was founded in Japan in 2009. If you’re wondering how it got its moniker, Mt. Gox was originally conceived as a site to trade the wildly popular Magic: The Gathering cards. The domain name, mtgox.com, was actually short for “Magic: The Gathering Online Exchange.”
But founder Jed McCaleb soon lost interest and decided to repurpose it into a trading platform for bitcoin. It was a tad more lucrative than cards for fantasy geeks. For each transaction, Mt. Gox received 1%, half of which was paid in bitcoin and the other half paid in hard currency like dollars. Despite the money pouring in, McCaleb realised it was too much for him to handle. So he sold his platform to a doughy French developer named Mark Karpelès.
Almost straight from the start, there were security issues. In 2011, hackers helped themselves to the company’s bitcoins and then tried to sell the motherlode, sinking the bitcoin price. The site had to go offline for a few days.
Despite some other funny business, the exchange kept flourishing. At its peak, Mt.Gox was responsible for over 75% of all bitcoin transactions worldwide.
More plot twists revealed themselves in 2014. In early February, users were no longer able to access their accounts. There were “technical problems”, according to Mt. Gox, so the assets had to be frozen. Karpelès seemed unusually calm about the whole situation.
But by February 24, the site went offline, returning a blank page. A few days later, Mt. Gox filed for bankruptcy. 750,000 of users’ bitcoins, as well as 100,000 of the company’s own bitcoins, had vanished from the vaults. They had a collective value of nearly half a billion dollars. It was apparently a raid by hackers…or was it?
Apparently, hackers had been skimming the company’s accounts for years. The explanation for this was that a bug in Mt. Gox’s system had enable the security breaches. And the team had been too incompetent to spot it.
But in the bitcoin communities and on Reddit, many expressed doubts about this version of events. Ex-staffers talked about the chaos within the company and how an unfocused Karpelès had ignored all the red flags. A cloud of suspicion hung over him.
Then, in August 2015, it wasn’t a hacker who was arrested – but Karpelès himself. There were charges that he had manipulated the bitcoin exchange’s computer systems to embezzle funds. Karpelès was released on bail in 2016 though the case against him is still ongoing at the time of publication.
But until today, it remains a mystery where the missing bitcoins have gone and who the real culprit is. And whether Karpelès was an evil genius or just a negligent chump who bit off more than he could chew…
Regardless, the whole saga eroded confidence in the cryptocurrency, hammering the price of bitcoin. It took nearly 18 months for bitcoin to bounce back, though we wish we could say the same for the investors who got burnt by the Mt. Gox disaster.
Learn more about trading on cryptocurrency exchanges here
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