Who is afraid of Mt. Gox?

Since July 2022, we have been living the story of "The Boy Who Cried Wolf" with the rumors surrounding the repayments from the infamous exchange Mt. Gox. Several false starts have suggested that refunds to its users were imminent. Now, two years later, this might finally become a reality. The questions that arise are: How did we get to this point? Why does this cause so much uncertainty in the market? And is this fear justified?

Mt. Gox, founded in 2010, was once the leading Bitcoin and cryptocurrency exchange, handling over 70% of global trading volume until its collapse in 2014 and subsequent declaration of bankruptcy. In 2011, the exchange experienced at least one hacker attack, a leak of user database information, and a fiat fund confiscation from federal authorities of a U.S. account. However, the most significant issue that plagued the exchange was an internal exploit. This exploit allowed the creation of USD balances out of thin air, which were then used to purchase BTC on the exchange and withdraw it to external wallets.

When it declared bankruptcy, the exchange claimed to have lost 750,000 BTC belonging to users and 100,000 BTC of its own funds. At that time, the total value of the lost assets was nearly $500 million; today, the fiat value of these funds would exceed $55 billion. According to the balance sheet presented by the Mt. Gox trustee, Nobuaki Kobayashi, in 2022, the available assets for repayments to creditors are 141,686 BTC (approximately $9.2 billion), 142,846 BCH (approximately $55.7 million), and 69.7 billion JPY (roughly $440 million). This represents about 20% of the total lost funds.

On July 5th, the Mt. Gox trustee announced that the repayment process to accredited users would begin through certain exchanges and other mechanisms. This announcement contributed to Bitcoin's drop to the $53,000 range, exacerbated by the movement of wallets identified as part of the Mt. Gox funds. Since the repayments were announced, even without a specific distribution date, they have caused market uncertainty. Firstly, because of the substantial size of these funds, and secondly, due to the assumption that users, upon receiving their funds, would sell their assets in full, thereby triggering a market crash.

Nevertheless, like all fear mechanisms in the market, the consequences of movements related to Mt. Gox have tended to be exaggerated and irrational. On one hand, it is assumed that users who receive the funds after ten years of waiting would sell all their Bitcoin holdings without considering the possibility of selling partially or holding onto their assets. On the other hand, it is assumed that all crypto assets will be liquidated in a single move or a series of consecutive moves that would disrupt the market. In reality, the Mt. Gox trustee has planned a series of staggered distributions to exchanges, according to specific conditions, with a final deadline set for October 31 of this year.

The timeline for the distribution of Bitcoin to exchanges varies depending on the conditions agreed upon by the trustee and each exchange. For example, Kraken has the widest window, with 90 days to complete payouts to creditors. Bitstamp has 60 days, BitGo has 20 days, while SBI VC Trade and Bitbank have up to 14 days. For instance, on July 5th, among the various internal wallet movements and external transfers related to repayments, 1,545 BTC were transferred to the Bitbank exchange.

It is estimated that between Kraken, Bitstamp, and BitGo, approximately 65,000 BTC will be transferred to their wallets. On July 16, as part of these movements, wallets associated with Mt. Gox moved 92,000 BTC to four addresses. Kraken confirmed the receipt of these assets without specifying the amount, but it is presumed to be 48,641 BTC associated with one of the addresses involved in these fund movements. Kraken, in turn, confirmed via emails to creditors that the refund would take place within 7 to 14 days.

Source: Arkham Intelligence

At the time of writing this and after the transfers to Kraken, the Mt. Gox trustee's BTC holdings are just over 90,000 BTC.

On the other hand, MtGox Investment Funds (“MGIF”) and Bitcoinica are the recipients of 30,000 BTC (20,000 and 10,000, respectively). MGIF has declared that it will not sell the recovered assets. As for Bitcoinica, which suffered a hack of its databases, it is difficult to determine how many of its users were retail investors due to this breach, making it very complicated to gauge their disposition towards selling.

As we have seen, the influx of repayments from Mt. Gox does not necessarily lead to a selling pressure that the market would be unable to absorb, and thus, it would not cause a collapse in Bitcoin's price. Creditors receiving their BTC are not forced to sell their entire holdings, and doing so would result in a tax burden. Therefore, it makes more sense for them to sell only a portion if they choose to sell. Moreover, the market sentiment is turning positive, as we saw in the latest Compass on Swissblock Insights.

Would the market be able to respond with liquidity to the potential sales from Mt. Gox creditors? It is very likely. In its worst moment, sales stemming from Grayscale's GBTC reached outflows close to $2.8 billion, a supply that the market could absorb. Our thesis is that sales by Mt. Gox creditors, once they receive their funds, would not represent a catastrophic scenario for the market, as the available liquidity would absorb them.

It might well be that the boy who cried wolf, and no one believed him, realized in the end that the wolf never came.