Is the storm over for Bitcoin?
Why everybody is freaking out about Mt. Gox and Bitcoin's future
Most headlines have one thing in common in the past one week: they all ask if this is the bottom for BTC price or is it going to get even worse. Phrased more like a doomsday scenario or with wild claims of the impact that Mt. Gox repayments will have on BTC price and crypto market. I’ve decided that today I am going to try my best to explain what’s the deal with Mt. Gox and why is everyone freaking out about it.
Let me start from the beginning, giving this story some sort of context. Mt. Gox was originally founded in 2006 by Jed McCaleb, a programmer. Initially, it was a platform for trading Magic: The Gathering cards (hence the name "Magic: The Gathering Online eXchange" or Mt. Gox). In 2010, McCaleb repurposed the site as a Bitcoin exchange and in 2011 sold the exchange to Mark Karpelès. By 2014, Mt. Gox became the largest Bitcoin exchange, handling over 70% of all BTC transactions. McCaleb is known for co-founding Ripple and later Stellar. He remains active in the cryptocurrency space, primarily focused on Stellar's development.
In February 2014, Mt. Gox suspended trading and filed for bankruptcy, claiming it had lost 850,000 BTC (worth about $450 million at the time). Later, about 200,000 BTC were found in old wallets, leaving around 650,000 BTC missing. Karpelès was arrested in Japan in 2015 on charges of embezzlement and data manipulation. He was found guilty of data manipulation in 2019 but acquitted of embezzlement charges. He received a suspended sentence and has since been released.
The exchange's failure under Karpelès' leadership led to the long-running legal proceedings and rehabilitation process that creditors are still dealing with today. In 2018, the case moved from bankruptcy to civil rehabilitation, allowing creditors to potentially receive BTC instead of fiat equivalent. The rehabilitation plan was approved in 2021, with repayments expected to begin in 2023. Here we are in 2024, and as Mt. Gox repayment is getting closer, lots of people are fearing this will drive BTC price down badly.
Looking at some headlines that predict 99% of claimants will sell their BTC once repaid to them you could say it’s not hard to see why BTC price has dropped to $55,987. Some new market participants might’ve freaked out at the thought of $9 billion dollars worth of BTC being suddenly put up for sale in the market. But let’s clear the air a little bit and let’s look at the details of the Mt. Gox repayment plan and what happened with the claims since the bankruptcy processes started back in 2014.
Here's the detailed current release plan as far as I'm aware:
Creditors are required to complete Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures before receiving their repayments, and they were given the choice between several repayment methods:
Bank transfer (in JPY)
Bank transfer (in foreign currency)
Cryptocurrency exchange
Direct cryptocurrency transfer.
The trustee announced that repayments would begin in tranches, rather than all at once. Subsequent tranches were planned to follow, with the entire process expected to take several months to a year or more. Repayments will be made in the order claims were received. It’s worth noting that even so creditors are set to receive a portion of their claimed assets, not the full amount.
An option for an "Early Lump-Sum Repayment" was offered to creditors who wanted to receive their funds more quickly but were willing to accept a potentially lower amount. We have no view on how many creditors chose this option.
For those opting for cryptocurrency repayments, the plan includes Bitcoin (BTC) and Bitcoin Cash (BCH) and the trustee has designated specific crypto exchanges to facilitate the transfer.
The trustee has publicly advised claimants not to expect immediate full repayments due to the complex nature of the rehabilitation process and the large number of creditors, with repayment process expected to take considerable time.
The reason why FOMO installed itself comfortably in people’s minds is on July 5th, Mt. Gox has transferred about 1,544 BTC to exchanges and 47,228.7 BTC (approximately $2.71 billion) moved to a new wallet address. I don’t believe that there will be such a selling pressure coming from Mt. Gox repayments because of several factors. Firstly, as I outlined above, the repayments will not happen in bulk. Then, we have to remember that with these repayments also comes a tax burden for the creditors so they will most likely look at what is the best way to sell their BTC or BCH to make sure they’re not hit with a major tax bill. Let’s not forget to mention that from 2014 to date, roughly around 70% of the claims were sold off to third parties, usually institutional buyers. They have no interest in dumping the market and lowering their profits they’ve been waiting for for a decade in some instances. These institutions typically have longer-term investment strategies and are less likely to liquidate large positions immediately.
The remaining 30% of individual creditors are made up of mostly long term holders, people who believe in Bitcoin, who haven’t stopped buying the asset just because Mt. Gox collapsed. So the repayment is not a high enough incentive to make a difference in their wealth to warrant selling their recovered BTC. Reports from Glassnode highlight that a large percentage of Bitcoin supply has not moved for several years. This behaviour is typical of long-term investors who have a strong conviction in Bitcoin's future potential. Historically, past events, such as the release of seized Bitcoins from Silk Road or government auctions, have shown that not all large releases lead to immediate sell-offs. Many holders choose to keep their assets or sell gradually to avoid impacting the market.
Another misunderstanding is repayments calculation. Let’s talk Mt. Gox rehabilitation numbers:
Total Number of Creditors ~ 24,000
Number of Bitcoins Lost ~ 850,000 BTC
Bitcoin Price in (early) 2014 ~ $400-500
Value in USD at Bankruptcy ~ $450 million (2014)
Bitcoins Recovered ~ 200,000 BTC
Net Loss ~ 650,000 BTC (never recovered)
Bitcoins to be Repaid ~ 142,000 BTC
Additional Repayment Methods ~ 143,000 BCH (Bitcoin Cash); 69 billion Japanese Yen (about $510 million USD)
The main point you need to understand is that creditors won’t receive the exact number of Bitcoins they lost. That’s impossible because most of them were never recovered and written off as loss. "What does it mean? How much will I get back?" I hear you ask.
How the Repayment Works:
The assets recovered (142,000 BTC, 143,000 BCH, and 69 billion JPY) will be distributed proportionally to the creditors based on their claims.
The claims were valued at the time of the bankruptcy using the BTC price then (around $480 per BTC). Each creditor's claim in BTC was converted to a fiat value to establish a baseline for proportional repayment.
Step-by-Step Calculation (with the help of my friend chatgpt 🙃)
Original Claim Value:
You had $1,000 in BTC at the time of the bankruptcy.
BTC was valued at approximately $480 per BTC.
Amount of BTC held: 1000 / 480 ≈ 2.08334801000 ≈ 2.0833 BTC.
Total BTC to Be Distributed:
Mt. Gox currently holds 142,000 BTC to distribute among creditors.
Total claims in BTC were for 850,000 BTC, with approximately 750,000 BTC being customer claims.
Proportional Repayment:
Proportion of BTC available for distribution: 142,000 / 750,000 ≈ 0.1893.
Therefore, each BTC claim will receive approximately 18.93% of the original claim amount in BTC.
BTC Repayment Calculation:
Your claim of 2.0833 BTC will receive 18.93% of that amount.
Repayment in BTC: 2.0833 × 0.1893 ≈ 0.3945 BTC.
Current Value of BTC:
Assuming current BTC market price of $56,461 (price at 8th July 2024).
Value of the BTC repayment: 0.3945 × 56,461 ≈ 22,270.84 USD.
Your effective percentage gain would be approximately 2,127.08% if the repayment happened in full, at the date of this calculation.
I understand this sounds like a lot and it is good profit in 10 years. Bear in mind though, that each time a repayment tranche is made, it will be repaid at the Bitcoin price of that particular day. So I want you to think, as a creditor, would you want to take your first tranche of BTC repayment, dump it all on the market and drive the price down? Would that benefit you? Or would you time your selling strategically to make sure you get most of your already slashed profits? I would do exactly that because I am in this market long enough to understand it, to know that Bitcoin will continue to have value regardless of the FOMO splashed all over the internet.
Now that we clarified the whole Mt. Gox drama, and hopefully got you to calm down your nerves, I have to say that it’s a reality BTC price has slumped recently. However, there are other factors besides Mt’ Gox repayments looming. The German government seized 50,300 Bitcoins in January 2022 from a fraudulent online streaming platform called "movie2k.to", which had been shut down in 2013, with the majority of the Bitcoin likely accumulated between 2009 and 2013 when the site was operational. The German government sold about 8,080 of the BTC from June 19th to July 5th. That leaves them with 42,270 Bitcoins – about 84% of what they started with. It’s not sure if they'll keep selling large amounts soon and this makes it hard to predict how much pressure there'll be to sell Bitcoin in the near future. It's a bit like waiting to see if a whale in the ocean will make big waves or not.
The current Bitcoin market is facing several challenges and selling pressure, and these factors combined have contributed to the recent price decline. However, it's important to consider the broader context. Bitcoin has demonstrated remarkable resilience in absorbing large-scale sales without a market collapse before. While short-term volatility is likely to stay for a while, these factors point towards a potentially strong medium to long-term outlook for Bitcoin. As global economic conditions stabilise and the cryptocurrency market continues to mature, we may see a return to a growth trajectory. Investors and enthusiasts, please remain informed and cautious, but there are logical reasons to maintain a cautiously optimistic view on Bitcoin's future prospects.
Hodl strong, trade wise, and let's regroup at the next all-time high!