Users of collapsed Bitcoin exchange Mt. Gox got their money back a decade ago. Starting from the beginning of July, the company will start paying users.
Kiyoshi Ota | Bloomberg | Getty Images
Mount Jukes, Japanese Bitcoin The stock exchange that collapsed and went bankrupt a decade ago after suffering a major hack is finally ready to pay off creditors, who are being handsomely rewarded for their patience.
In 2011, up to 950,000 bitcoins were lost in a hack, at a time when the cryptocurrency was trading at a fraction of its current value. About 140,000 of those coins have been recovered, which at today’s prices means that about $9 billion worth of bitcoins will be returned to their owners.
Among those seeking compensation is Gregory Green, an Illinois native. Shortly after the exchange declared bankruptcy in February 2014, Green filed a class-action lawsuit against Mt. Gox and its former CEO. Green said at the time that his frozen account contained $25,000 worth of bitcoin, though he did not disclose the exact number of coins in his wallet.
The price of Bitcoin at the time was around $600. Today, it is worth more than $60,000. This suggests that Green's lost stock, at current prices, could be worth about $2.5 million, equivalent to a 10,000% profit. However, it is unclear how much he will receive in the payments, which are expected to start appearing in July.
Creditors are about to receive a historic windfall, said John Glover, chief investment officer at cryptocurrency lender Ledn.
“Clearly many will cash in and enjoy the fact that freezing their assets in the Mt. Gox bankruptcy was the best investment they ever made,” Glover told CNBC.
What is Mount Gox?
Mt. Gox was an online marketplace where people could buy or sell bitcoin using different currencies. At its peak, the site was the world’s largest spot bitcoin exchange, claiming to handle about 80% of all global dollar-to-bitcoin trades.
The company, whose acronym was created from the name “Magic: The Gathering Online Exchange”, was shut down in February 2014 after a series of robberies.
Mt. Gox blamed the disappearance of bitcoin on a glitch in the cryptocurrency’s framework. Mt. Gox said that while users were receiving incomplete transaction messages when accessing the exchange, hackers may have illegally transferred the coins from their accounts.
The court-appointed trustee to oversee bankruptcy proceedings at the stock exchange said on Monday that distributions to the company's roughly 20,000 creditors would begin next month. The exchanges will be a mix of Bitcoin and Bitcoin Cash, an early offshoot of the original cryptocurrency.
Alex Thorne, head of research at crypto asset manager Galaxy Digital, said in a note last month that the vast majority of creditors he spoke to said they would take payments in kind, meaning in cryptocurrency rather than fiat currency. They would also largely hold onto assets.
He said many of the major holders of Mt. Gox assets are well-known in the bitcoin world, including early bitcoin investor Roger Ver, Blockstream co-founders Adam Back and Greg Maxwell, and Bruce Fenton, the former CEO of the Bitcoin Foundation.
Some will take the money and run
Based on conversations with institutional investors owed the payments, “We do not believe there will be significant selling from this group,” Thorne wrote.
However, Glover, who was previously a managing director at Barclays, said there was likely to be a big sell-off among creditors who had the opportunity, after years of waiting, to receive huge gains.
“Obviously some will choose to take the money and run,” Glover said.
Analysts at JPMorgan Chase said the prospect of heavy selling from Mount Jukes' creditors creates “downside risks” next month, although these will be short-lived.
“Assuming that most of the liquidations by Mt. Gox creditors take place in July, (this) creates a path where cryptocurrency prices come under more pressure in July, but begin to recover from August onward,” the analysts wrote.
There’s also the possibility that a number of Mt. Gox bitcoin investors have already withdrawn their funds. In the 10 years since the exchange declared bankruptcy, a secondary market has emerged for those who wanted to liquidate their bankruptcy claims. Those who held on were the true believers, Thorne said.
“Thousands of these creditors have waited 10 years to get paid and have resisted aggressive and aggressive claims offers during that time, suggesting they want their coins back,” Thorne said. He said he expects limited selling pressure but acknowledged that if only 10% of distributed bitcoin is sold “it will have an impact on the market.”
Some tax consequences may deter sales.
The main reason Mt.Gox creditors chose to pay in kind has to do with the tax implications, said Luke Nolan, an Ethereum research associate at digital asset manager CoinShares. JPMorgan said in a note on Monday that people are inclined to accept their exchange in cryptocurrencies, “either for tax reasons or because they believe that liquidation now will negate other potential price gains in the future.”
Glover said there are ways to avoid the large capital gains tax while still benefiting from the massive rise in bitcoin's value.
“Those in jurisdictions that tax capital gains may choose to hold their positions to avoid this huge tax bill, and instead use bitcoin as collateral to borrow dollars, thus generating income from bitcoin without having to sell it,” Glover said.
