In 2010, a new digital currency called Bitcoin was gaining popularity among technologists, financial traders, and those looking for alternatives to government-backed money. To allow easier trading of this novel cryptocurrency, a platform called Mt. Gox was launched in Tokyo. What began as a simple bitcoin exchange would eventually grow into the largest in the world, only to crash in epic fashion a few years later.
Mt. Gox’s Humble Beginnings
Jed McCaleb, an American software developer, originally created Mt. Gox in 2010 as a trading platform for Magic: The Gathering cards, hence the name Magic: The Gathering Online Exchange.
However, he soon realized the greater potential application to a new digital currency called bitcoin that was gaining traction. He sold the fledgling site to Mark Karpelès, an enthusiastic French programmer living in Japan, who transitioned it into a bitcoin exchange.
As interest in bitcoin began to explode globally, so did business at Mt. Gox. By 2013, it was handling over 70% of all bitcoin transactions worldwide.
Approximately $1.5 billion worth of bitcoins were bought and sold on Mt. Gox per month. As the “on ramp” where most people purchased their first bitcoins, Mt. Gox fueled much of bitcoin’s early adoption.
Too Much Success Too Fast
However, the small staff of Mt. Gox struggled to scale operations to handle their sudden massive growth. Experts believe the exchange’s back-end infrastructure was simply not robust enough to safely manage customer accounts and billions of dollars in transactions. Pressure mounted as competitors also entered the bitcoin exchange business.
Technical Issues Emerge
In early 2014, Mt. Gox customers began complaining on chat forums that they were unable to withdraw funds or experienced long delays. The company initially blamed technical issues and suspended withdrawals temporarily. But internally, they discovered a glitch had enabled people to fraudulently withdraw bitcoins without authorization.
Panic set in as confidence in Mt. Gox plummeted. The price of bitcoin on Mt. Gox diverged significantly lower than other exchanges due to the withdrawal issues. The company frantically tried reassuring customers while scrambling to fix the technical problems. But within days, bitcoin withdrawals were completely halted, and Mt. Gox ultimately filed for bankruptcy.
Bitcoin Keys Lost or Stolen
Mt. Gox admitted that approximately 850,000 bitcoins belonging to customers, worth over $450 million, were mysteriously gone. Later investigations found that administrative bitcoin keys had either been lost or stolen at various times over the prior three years. The company had not noticed until it was too late.
CEO Mark Karpelès Blamed
Much blame fell on Mt. Gox CEO Mark Karpelès for mismanaging the crisis and customer funds. However, he denied the missing bitcoins were due to misconduct. Still, many critics felt Mt. Gox lacked the appropriate security, auditing, and technical expertise to safely operate such a large bitcoin exchange.
Long Road to Recovery
For years after its 2014 collapse, Mt. Gox customers fought to recover any remaining funds. By 2018, over $500 million worth of bitcoin and cash was paid back to approved creditors. While this represented a fraction of total assets lost, it was more than many expected to ever recover following such an infamous crypto failure.
The saga of Mt. Gox remains one of the darkest chapters in Bitcoin’s early years. The lessons learned helped drive more transparency and better practices across the cryptocurrency industry. But for many early adopters, the painful downfall of Mt. Gox is an inextricable part of Bitcoin’s origin story. The exchange may have essentially introduced Bitcoin to the world, only to severely damage its reputation shortly after.