Bitcoin
Bitcoin windfall arrives for Mt. Gox creditors after 10,000% price spike
Users of the failed Mt. Gox bitcoin exchange have been trying to get their money back for a decade. Starting in early July, the company will begin paying out users’ funds.
Kiyoshi Ota | Bloomberg | Getty Images
Mount Gox the Japanese Bitcoin The exchange that went bankrupt a decade ago after a major hack is finally ready to repay creditors, who are being 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 small fraction of its current value. About 140,000 of these coins have been recovered, an amount that, at today’s prices, means about $9 billion worth of bitcoins will be returned to their owners.
Among the plaintiffs is Gregory Greene, a native of Illinois. Shortly after the exchange declared 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 worth of bitcoin, though he did not disclose the exact number of coins in his wallet.
Bitcoin was then trading at around $600. Today it is worth more than $60,000. This suggests that Greene’s lost stash, at current prices, would be worth around $2.5 million, a gain of 10,000%. However, it is unclear how much he will receive in the payments, which are expected to start rolling out in July.
John Glover, chief investment officer at crypto lending firm Ledn, said lenders are about to get a historic windfall.
“Many are clearly going to cash out and take advantage of the fact that having their assets trapped in the Mt. Gox bankruptcy was the best investment they ever made,” Glover told CNBC.
Mt. Gox was an online marketplace where people could buy or sell bitcoin using different currencies. At the height of its success, the platform was the largest spot bitcoin exchange in the world, claiming to handle around 80% of all global dollar-to-bitcoin trades.
The company, whose acronym was created from the name “Magic: The Gathering Online Exchange”, closed in February 2014 after a series of robberies.
Mt. Gox blamed bitcoin’s demise on a bug in the cryptocurrency’s structure. While users were receiving incomplete transaction messages when accessing the exchange, in reality the coins may have been illicitly moved by hackers out of their accounts, Mt. Gox said.
On Monday, the court-appointed trustee overseeing the exchange’s bankruptcy proceedings he said distributions to the company’s roughly 20,000 creditors would begin next month. Disbursements will be made in a mix of bitcoin and bitcoin cash, an early fork of the original cryptocurrency.
Alex Thorn, head of research at crypto asset management firm Galaxy Digital, said in a note last month that the vast majority of lenders he spoke to said they will accept a payment in kind, i.e. in cryptocurrency rather than fiat. They will also largely keep the assets.
Many of the major rights holders of Mt. Gox assets, 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.
Based on conversations with institutional investors about to receive payments, “we do not believe there will be significant selling from this group,” Thorn wrote.
However, Glover, who was previously managing director of Barclays, said there was still likely to be significant selling among lenders who, after years of waiting, have the opportunity to secure huge gains.
“Some will clearly choose to take the money and run,” Glover said.
Analysts at JPMorgan Chase said the potential for heavy selling by Mt. Gox lenders creates “downside risk” next month, albeit a short-lived one.
“Assuming most of the liquidations of Mt. Gox creditors occur in July, [this] creates a trajectory where cryptocurrency prices come under greater pressure in July but begin to recover from August onwards,” the analysts wrote.
There’s also the likelihood that several bitcoin investors in Mt. Gox have already cashed out. In the 10 years since the exchange filed for bankruptcy, a secondary market has emerged for those looking to cash out its bankruptcy filing. Those who have held out are the true believers, Thorn said.
“Thousands of these creditors waited 10 years for payments and resisted convincing and aggressive credit offers during that period, suggesting they wanted their coins 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 impede sales.
Luke Nolan, an ethereum research associate at digital asset management firm CoinShares, said a big reason Mt. Gox’s creditors opted for in-kind repayment has to do with tax implications. And JPMorgan said in a note Monday that people are leaning toward accepting their crypto outlay, “either for tax reasons or because they feel that liquidating now would negate potential price gains in the future.”
Glover said there are ways to get around a large capital gains tax while still taking advantage of bitcoin’s huge appreciation.
“Those in jurisdictions with capital gains tax may choose to hold their positions to avoid this huge tax bill,” Glover said, “and instead use their bitcoin as collateral to borrow dollars, thereby monetizing bitcoin without having to sell it.”