The fall of MtGox is quite possibly the biggest story in bitcoin up to this point in time. Although it’s not the story for bitcoin from a PR perspective, it is probably the one story that the majority of the people in developed countries have heard when it comes to cryptocurrency. For this reason, many people just think about Silk Road and MtGox when they hear someone talking about bitcoin.
Of course, it’s not like the collapse happened overnight. In fact, many members of the bitcoin community were warning about the problems at MtGox years before the exchange collapsed. Although we don’t know the full details, it can be helpful to take a look back at the entire history to see when the warning signs became large enough to see the writing on the wall.
Let’s start from the beginning and take a look at how we got to where we are today.
Before MtGox was known as the world’s largest bitcoin exchange, it was used for trading Magic: The Gathering Online trading cards. In fact, this is where the bitcoin exchange got its name MtGox (Magic: The Gathering Online Exchange). The website was rebranded as a bitcoin exchange in the summer of 2010, making it one of the first places where traders could find a market price for this new, digital currency.
The exchange continued to grow over the next year as the bitcoin price reached $0.50 and then dollar parity a few months later. It was at this point that the site’s founder, Jed McCaleb, decided to sell MtGox and focus on other projects. Although he sold the exchange to Mark Karpeles’s Tibanne, McCaleb retained a 12% stake in the company. Karpeles had completed some software development for MtGox before the purchase, so it made sense for McCaleb to turn the company over to him.
McCaleb cited the increasing demands of running an exchange as his reason for selling MtGox, and he seemed to think that Karpeles would be more able to handle the workload.
MtGox Hacked in 2011
Some people who are new to the bitcoin ecosystem may not know this, but MtGox had a history of hacks and poor management. The so-called “transaction malleability” fiasco from early 2014 was not the first time that MtGox had been hacked. In June of 2011, just under $9 million worth of bitcoins were “stolen” from MtGox users by a malicious hacker. The good news is that the bitcoins were not withdrawn from MtGox. The hacker sold the bitcoins on the exchange in an attempt to crash the market. The price was taken down to the penny, but it quickly corrected to its correct value after the hack was noticed.
Account credentials were exposed during the hack, which led to many users of MyBitcoin.com having their accounts accessed by a hacker. Only users who were using the same credentials on MtGox and MyBitcoin were affected by this secondary hack.
MtGox also accidentally destroyed 2609 bitcoins in late 2011 by sending those coins to an address that does not exist. This sort of mistake is automatically blocked by the standard bitcoin client, but it exposed a weakness in the bitcoin protocol where nodes on the network do not check to make sure that bitcoins are being sent to a valid address. MtGox pledged to refund users who would have been affected by the mistake.
Read the second part of the article – The Rise and Fall of MtGox: A Complete Timeline (Part 2)