Users of the crashed bitcoin exchange Mt. Gox have been trying to get their money back for a decade. From early July, the company will start refunding users.
Kiyoshi Ota | Bloomberg | Getty Images
Mount Gox, the Japanese bitcoin The stock market that collapsed into bankruptcy a decade ago after a major hack is finally ready to repay creditors, who are handsomely rewarded for their patience.
Up to 950,000 bitcoins were lost in the 2011 hack, at a time when the cryptocurrency was trading for a tiny fraction of its current value. About 140,000 of those coins were recovered, a haul that, at today’s prices, means about $9 billion worth of bitcoin will be returned to its owners.
Among the contenders is Gregory Green of Illinois. Shortly after filing for bankruptcy in February 2014, Greene filed a class action lawsuit against Mt. Gox and its former CEO. Greene said at the time that his frozen account contained $25,000 in bitcoins, though he did not disclose the exact number of coins in his wallet.
Bitcoin was then trading at around $600. Today it is worth over $60,000. This suggests that Greene’s lost stock, at current prices, would be worth about $2.5 million, a 10,000% gain. However, it is unclear how much he will receive from the payments, which are expected to begin rolling out in July.
John Glover, chief investment officer at cryptocurrency lending firm Ledn, said lenders are set to receive a historic windfall.
“Many will clearly cash out and enjoy the fact that having their assets stuck in the bankruptcy of Mt. Gox was the best investment they ever made,” Glover told CNBC.
What was Mount Gox?
The Mt. Gox was an online marketplace where people could buy or sell bitcoins using different currencies. At the height of its success, the platform was the world’s largest spot bitcoin exchange, claiming to handle around 80% of all global dollar transactions for bitcoin.
The company, whose acronym was created from the name “Magic: The Gathering Online Exchange”, closed in February 2014 after a series of robberies.
Gox blamed the disappearance of bitcoin on a bug in the cryptocurrency framework. While users were receiving incomplete transaction messages when accessing the exchange, in reality the coins may have been illegally moved by hackers from their accounts, said Mt. Gox.
On Monday, the court-appointed receiver overseeing the stock market’s bankruptcy proceedings he said Distributions to the company’s approximately 20,000 creditors will begin next month. Disbursements will be made in a mix of bitcoin and bitcoin cash, an early offshoot of the original cryptocurrency.
Alex Thorn, head of research at cryptocurrency manager Galaxy Digital, said in a note last month that the vast majority of creditors he has spoken to have said they will receive payment in kind, meaning in cryptocurrency rather than fiat. They will also largely keep the assets.
Many of the leading holders with claims to assets of Mt. Gox, he said, are well known in the bitcoin world. They include early bitcoin investor Roger Ver, Blockstream co-founders Adam Back and Greg Maxwell, and Bruce Fenton, former executive director of the Bitcoin Foundation.
Some will “take the money and run”
Based on conversations with institutional investors due for payments, “we do not believe there will be any significant selling from this group,” Thorn wrote.
But Glover, who was previously chief executive of Barclays, said there was still significant selling among creditors who, after years of waiting, have a chance to lock in huge profits.
“Some will clearly choose to take the money and run,” Glover said.
Analysts at JPMorgan Chase said the potential for high selling by creditors of Mt. Gox poses a “downside risk” next month, though it would be short-lived.
“Assuming that most liquidations from Mt. Gox’s creditors take place in July, [this] it creates a trajectory where cryptocurrency prices come under further pressure in July, but start to recover from August onwards,” the analysts wrote.
There is also the possibility that some bitcoin investors on Mount Gox have already cashed out. In the 10 years since the stock market filed for bankruptcy, a secondary market has emerged for those looking to liquidate the bankruptcy claim. Those who endure are the true believers, Thorne said.
“Thousands of these creditors have waited 10 years for payment and have resisted exciting and aggressive claims offers during that time, suggesting they want their money back,” Thorn said. He said he expects limited selling pressure, but acknowledged that if even 10% of distributed bitcoin is sold “it will have an impact on the market.”
Certain tax consequences may prevent sales.
Luke Nolan, ethereum research associate at digital asset manager CoinShares, said a big reason the creditors of Mt. Gox opted for in-kind compensation has to do with tax implications. And JPMorgan said in a note on Monday that people are leaning toward accepting their cash-out in crypto, “either for tax reasons or because they believe liquidating now will cancel out potential further price gains in the future.”
Glover said there are ways to avoid a large capital gains tax while still taking advantage of bitcoin’s huge increase in value.
“Those in jurisdictions with a capital gains tax may choose to hold their positions to avoid that huge tax bill,” Glover said, “and instead use their bitcoin as collateral to borrow dollars, thereby making money from bitcoin without having to sell it.”
