MtGox Overheats with Bitcoin Price in April 2013

The media started to talk about bitcoin quite a bit in early 2013, and all that hype eventually led to one of the largest bubbles in bitcoin’s history. MtGox was responsible for roughly 75% of all bitcoin trading at this time, and it seemed as if everyone was trying to get into the bitcoin market at once. The price kept rising to around $250 on MtGox until the exchange started to stall and lag behind the orders that were coming in from users. It’s possible that the inability for MtGox to handle this new influx of users harmed bitcoin’s reputation as a new digital currency.

Read the first part of the story: The Rise and Fall of MtGox: A Complete Timeline (Part 1)

MtGox ended up suspending trading on April 11th and 12th for a market cooldown. MtGox returned to trading roughly 150,000 bitcoins per day by next month.

Problems with the Legacy Banking System

Throughout its history, MtGox also had problems with the legacy banking system. While deposits and withdrawals of bitcoins usually had no issues, the legacy banking system was unsure of how to deal with this new currency that could potentially be used for money laundering.

The first issues on the fiat side of MtGox’s trading platform occurred with Dwolla. Some accounts had become restricted by Dwolla due to new anti-money laundering requirements put into place by the bank transfer platform, and transfers to those accounts were canceled in result. The dispute with Dwolla eventually led to a three-month delay on some dollar withdrawals, and MtGox eventually severed ties with the company. TradeHill was another exchange that had issues with Dwolla. The exchange was accepting Dwolla deposits for trading on their exchange, but users were able to chargeback those deposits at a later date. It went against Dwolla’s Terms of Service, and TradeHill eventually took Dwolla to court for their actions.

Only a few months after the incident with Dwolla, the US Department of Homeland Security seized funds from MtGox’s North American accounts. More than $5 million was seized from the bitcoin exchange, and the reason for the action from the US Government was MtGox’s lack of a money services business license. MtGox later received that license in June of the same year.

Throughout 2013 and early 2014, MtGox was also experiencing long delays in processing certain fiat currency withdrawals. Karpeles allegedly told Roger Ver, a respected member of the bitcoin community, that their Japanese banking partner was limiting them to a few international transfers per day. It effectively limited the number of withdrawals that they were able to process on a daily basis, although many users began to suspect that the exchange could be insolvent.

Transaction Malleability

In addition to the fiat withdrawal issues, MtGox began to experience issues related to bitcoin withdrawals in early February 2014. The company decided to halt all bitcoin withdrawals on the 7th of that month, and they claimed they needed to take a look at the technical issues that were causing the delays. MtGox eventually claimed that transaction malleability was to blame for their bitcoin withdrawal issues, although this was a bug in the bitcoin software that had been known to exist for many years. Many members of the bitcoin development community pointed out that the software issue was with MtGox, not with the core bitcoin protocol.

By the 20th of February, MtGox users started to gather outside the offices of the bitcoin exchange in Japan. The users were demanding to know what had happened to their bitcoins, but they were not getting any answers from Mark Karpeles or MtGox employees. At one point, Karpeles was blocked from entering the MtGox offices by a protester who was demanding answers to his questions. Throughout this entire ordeal, press releases from MtGox claimed that the staff was working on potential security issues with their platform. It was at this point that the MtGox price of bitcoin began to dip below the price seen on other exchanges. It was the market’s way of saying that there was a chance that MtGox did not have the bitcoins.

Bankruptcy

After a leaked document claimed that MtGox was insolvent and missed nearly 750,000 of its customers bitcoins, the MtGox website was taken down, and transactions were halted. MtGox filed for bankruptcy on February 28, 2014, noting that it currently had $64 million in liabilities and a little more than half of that in assets. In addition to its customers’ funds, MtGox also reported that they had lost 100,000 of their bitcoins. The total number of bitcoins that were stolen or lost amounted to 7% of all bitcoins at the time. These bitcoins were valued at just under $500 million.

Moral of the Story

While the entire MtGox story has turned many people off, it’s important for the bitcoin community to take it as a learning experience. If you don’t own the private keys to your bitcoins, then you don’t own those bitcoins. It is an issue that is hard for some users to understand because they are used to being able to get their money back if their account is hacked or they make a mistake with the payment. Bitcoin is digital cash, so there’s no going back once it has been sent to someone else. The MtGox situation should show everyone the importance of taking control of your bitcoin security and thinking twice about who should be trusted with those bitcoins. After all, bitcoin was created to remove the need for third parties in the digital payments space.

Read the first part of the story: The Rise and Fall of MtGox: A Complete Timeline (Part 1)