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Bitcoin windfall arrives for Mt. Gox lenders after 10,000% price surge.
Users of the collapsed Mt. Gox bitcoin exchange have been trying to get their money back for a decade. Starting in early July, the company will begin refunding users their funds.
Kiyoshi Ota | Bloomberg | Getty Images
Mt. Gox, the Japanese bitcoin The stock market that collapsed into bankruptcy a decade ago after a major cyberattack 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 those coins have been recovered, a haul that, at today’s prices, means about $9 billion in bitcoin will be returned to its owners.
Among the plaintiffs is Gregory Greene, originally from Illinois. Soon after the exchange filed for 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 in 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. That suggests Greene’s lost stash, at current prices, would be worth about $2.5 million, a gain of 10,000%. However, it is unclear how much he will receive from the payments, which are expected to begin being distributed in July.
John Glover, chief investment officer of cryptocurrency lending firm Ledn, said lenders are about to receive a historic windfall.
“Many will clearly cash in and appreciate the fact that having their assets tied up 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-for-bitcoin transactions.
The company, which took its acronym from the name “Magic: The Gathering Online Exchange,” closed its doors in February 2014 after a series of robberies.
Mt. Gox attributed the disappearance of bitcoins to a flaw in the cryptocurrency’s architecture. While users received incomplete transaction messages when logging into the exchange, the coins may actually have been illicitly moved by hackers out of their accounts, Mt. Gox said.
The court-appointed trustee overseeing the stock exchange’s bankruptcy proceedings on Monday She said distributions to the company’s approximately 20,000 creditors will begin next month. The disbursements will take place in a mix of bitcoin and bitcoin cash, an early offshoot of the original cryptocurrency.
Alex Thorn, head of research at cryptocurrency asset management firm Galaxy Digital, said in a note last month that the vast majority of creditors he spoke to said they would accept payment in kind, meaning in cryptocurrency rather than in fiat. They will also largely maintain operations.
Many of the major holders with claims to Mt. Gox assets, he said, are well-known in the bitcoin world. Among them are the first 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 awaiting payments, “we do not believe there will be significant selling by this group,” Thorn wrote.
However, Glover, who was previously chief executive of Barclays, said there was still likely to be significant sell-offs among lenders who, after years of waiting, have the opportunity to lock in 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, although it would be short-lived.
“Assuming that most of the liquidations by Mt. Gox creditors occur in July, [this] “creates a trajectory where cryptocurrency prices come under further pressure in July, but begin to recover from August onwards,” the analysts wrote.
There is also the likelihood that a number of bitcoin investors in Mt. Gox have already cashed out. In the 10 years since the exchange filed for bankruptcy, a secondary market has sprung up for those looking to settle their bankruptcy filings. Those who have resisted are the true believers, Thorn said.
“Thousands of these creditors have waited 10 years for payments and have resisted compelling and aggressive claims offers during that time, which suggests they want their coins back,” Thorn said. He said he expects limited selling pressure, but acknowledged that if even 10% of distributed bitcoin were sold “it would have an impact on the market.”
Some tax consequences may discourage sales.
Luke Nolan, an ethereum research associate at digital asset management firm CoinShares, said a major reason Mt. Gox lenders have opted for in-kind repayment is related to tax implications. And JPMorgan said in a note Monday that people are inclined to accept their cryptocurrency outlays “both for tax reasons and because they believe liquidating now would negate potential further price gains in the future.”
Glover said there are ways to evade a large capital gains tax and, at the same time, benefit from bitcoin’s huge increase in value.
“Those in jurisdictions with capital gains taxes 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 the bitcoin without having to sell it.”