The Mt. Gox Debacle
Mt Gox, a reoccurring nightmare for many early crypto investors, is back and dressed appropriately in a custom-fit bear costume. After five years, creditors will finally get paid what is “legally” owed to them, a sum of around 400 million USD (850,000 coins were taken in February and priced in April at $483/BTC). This news in and of itself, is good, right? The recurring nightmare should be coming to a rest, buried in the past as a story to remember of the wild times of early cryptocurrency investing. Alas, aligned with the continued theme of bad decision making by those in charge of Mt Gox, the story does not end “happily ever after.”
There are quite a few red flags that have popped up during these proceedings, the largest and most apparent red flag being the decision to sell the 35,841 bitcoins needed to reimburse the creditors on the open market, via an exchange. Not only is this decision by Mt Gox trustee Nobuaki Kobayashi completely irresponsible, it’s also questionably stupid. As opposed to selling on an exchange, Kobayashi could’ve easily sold it “over the counter” or OTC and made more money per bitcoin. Even Kraken, an exchange based in San Francisco, offered to help unload the coins OTC, to which Kobayashi declined. This raises a simple question, why? What advantage did Kobayashi have in selling these coins via an exchange? Some claim ignorance on Kobayashi’s end, stating that as a court appointed trustee, he may not have known about other options, or even cared. His job was simply to follow court orders and reimburse the creditors in the quickest possible way.
I’m inclined to disagree with the claim of ignorance and even further, I think Kobayashi knew exactly what he was doing. Free markets work relatively the same way and with leaders in the space advising him to sell OTC and even going as far as to say they would help him, Kobayashi knew full well what the repercussions of a dump like this were.
Insinuating the possibility of malicious wrongdoing would be dismissed if one was to only consider Kobayashi as a single player in the dump. The first transfer of funds from the cold storage wallets of Mt Gox to an exchange came on December 18th of last year, one day after Bitcoin hit it’s all time high. The amount, however, was only 2,000 BTC. In a market as large as Bitcoin, this would affect the market price very little. Two days later Charlie Lee, creator of Litecoin and ex-Director of Engineering at Coinbase, announced that he had sold his entire holdings of Litecoin. Two days after the Lee announcement, another transfer of 6,000 BTC from the Mt Gox cold storage to an exchange occurred. This selloff continued for a month an a half, from the first dump on December 18th to the final dump of 18,000 BTC on February 5th.
Looking at a graph, you can easily see the correlation between the Mt Gox dump and the downward trendline that Bitcoin experienced; lasting, ironically, from the 18th of December to the 5th of February. Some could say that Bitcoin was severely overbought at the all-time high and it would be difficult to refute those claims. No knowledgeable person in their right mind would believe that the only reason Bitcoin has experienced such a harsh retracement in the last few months, is solely due to the Mt Gox selloff. The fear of regulation and mainstream media FUD most certainly drove the buying interest down. There are plenty of factors that played into the loss of 70% of Bitcoin’s market cap over a month and a half span, but many people are missing the scary possibility of market manipulation that could’ve easily happened.
Think about it. If Kraken knew, and they did, that this selloff would be happening, who did they tell? If Charlie Lee wanted to sell his holdings to avoid “a conflict of interest” what compelled him to announce his selloff, knowing it would cause FUD in the market? Major players, or whales, in any market are always the first to know about information that could affect their investments. Insider trading is illegal, for obvious reasons, but inherently common. The problem of insider trading has long been avoided in conversations about the crypto market, but this recent display of market manipulation should bring it to the forefront.
Who’s to say that many whales with this information didn’t sell off and open a short position on the market? This market is small and heavily centralized, a sad realization for a market aimed to decentralize the world. Coinbase earlier in the year was wrapped up in a scandal concerning the Bitcoin Cash rollout on their exchange and the possibility of insider trading. It took until March 7th for the Mt Gox trustee to release information about the sell off that had occurred, while many on the inside knew well in advance.
This Mt Gox story hasn’t ended. The creditors got paid back the $400,000,000 but the trustee still holds a little more than 166,000 bitcoins that need to be dispersed. As of right now, there are two options for the bitcoins: the court can proceed with civil rehabilitation and distribute the coins back to the creditors, or the coins will be given back to the shareholders of Mt Gox. Both options offer a problem for the crypto community. The first option would, in my personal opinion, be the most correct and fair. There is, however, some danger and reason for FUD if the civil rehabilitation proceeds. Many of these people are normal, everyday middle class workers. With Bitcoin being worth twenty times what it was when these people got their coins stolen, how many of those dispersed coins will be instantly put up for sale on an exchange. These creditors could potentially have a small fortune after these proceedings and many would understandably be weary of holding onto their assets. This could potentially mean another large sell off, for many months to come. The second option, in my opinion, is morally wrong as Mt Gox is 88% owned by the Japanese company, Tibanne. Tibanne, ironically, is 100% owned by Mark Karpeles, the former CEO of Mt Gox. This means that if the court opts for option two, Karpeles could walk away with 1.5 billion USD of funds stolen from the creditors.
This whole situation is a mess and stinks of market manipulation and fraud. This is simply a reminder that the average person in the market is just a small fish, swimming in the currents made by whales.
About The Author
Skylar Cobb is a CCG Consultant and the MC of the podcast, "The Crypto Current". His connection to real-estate dates back to 2016 when he worked for a real-estate franchise company, Keller-Williams.