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The Mt. Gox Collapse (2014) and the Rise of Proof of Reserves

How the largest early exchange lost about 850,000 BTC and why Merkle-tree proof of reserves emerged.

From card exchange to dominant venue

Mt. Gox began as a Magic: The Gathering card trading site and was converted to a bitcoin exchange by Jed McCaleb in July 2010. Mark Karpelès bought it in 2011, and by 2013 it handled an estimated 70 percent of global bitcoin volume from offices in Shibuya, Tokyo.

The withdrawal halt

On February 7, 2014, Mt. Gox halted BTC withdrawals, citing transaction malleability, a flaw that let third parties alter a transaction's ID before confirmation. On February 24 the site went offline, and on February 28 it filed for bankruptcy protection in Japan, reporting roughly 850,000 BTC missing, about 750,000 of them belonging to customers.

Where the coins went

Later forensics, including the WizSec investigation, concluded that hot-wallet keys were compromised as early as 2011 and coins were drained over years. About 200,000 BTC were later found in an old-format wallet. Alexander Vinnik was charged in 2017 over laundering proceeds through BTC-e.

The long repayment

The trustee Nobuaki Kobayashi oversaw a civil rehabilitation process that set a creditor repayment deadline repeatedly. Distributions finally began in July 2024, when roughly 140,000 BTC plus bitcoin cash were moved to exchanges such as Kraken and Bitstamp for creditors, about ten years after the collapse.

Lessons for custody

Mt. Gox is the origin of the not your keys, not your coins mantra and an early prompt for proof of reserves, in which an exchange publishes a Merkle tree of liabilities and signs from wallets showing matching assets. The FTX collapse in 2022 showed those lessons still were not universal.

By the numbers

For The Mt. Gox Collapse and the Rise of Proof of Reserves, the reference figures are halted withdrawals of February 7, 2014, went offline of February 24, 2014, btc reported missing of ~850,000 (200,000 later found), repayments began of 2024. The comparison table below lines up milestone, date — Converted to BTC exchange: July 2010; Withdrawals halted: Feb 7, 2014; Bankruptcy filing: Feb 28, 2014; ~200,000 BTC rediscovered: Mar 2014; Creditor repayments begin: July 2024.

Modeling The Mt. Gox Collapse and the Rise of Proof of Reserves with the Crypto Profit Loss Calculator

The Crypto Profit Loss Calculator takes three inputs — Buy price ($), Sell price ($), Amount invested ($). P/L = invested × (sell ÷ buy − 1). With its default inputs (Buy price ($) = 100; Sell price ($) = 150; Amount invested ($) = 1000) it returns 500 $; swap in the figures from The Mt. Gox Collapse and the Rise of Proof of Reserves above to reproduce the scenario yourself.

Modeling The Mt. Gox Collapse and the Rise of Proof of Reserves with the Portfolio Herfindahl Concentration Scorer

The Portfolio Herfindahl Concentration Scorer takes three inputs — Top asset weight (%), Second weight (%), Other assets (equal). HHI = Σ weight². With its default inputs (Top asset weight (%) = 60; Second weight (%) = 25; Other assets (equal) = 5) it returns 0.43 HHI; swap in the figures from The Mt. Gox Collapse and the Rise of Proof of Reserves above to reproduce the scenario yourself.

Data Table

For educational and informational purposes only. Not financial, investment, tax or legal advice. Figures are approximate and historical; crypto assets are volatile and you may lose capital. Do your own research.