Mt. Gox Meltdown: The Crash That Nearly Killed Bitcoin

On 29 November 2013 a single bitcoin traded for $1,242 on Mt. Gox, the Tokyo exchange that handled a large share of the world's bitcoin trading. For a few hours one coin was worth about as much as an ounce of gold. Eleven months earlier it had cost about $13.

Fourteen months later, in January 2015, bitcoin was changing hands for about $177. Measured from the CoinDesk price index peak of $1,165.89 on 30 November 2013, that was a fall of roughly 85%. Mt. Gox no longer existed. About 850,000 bitcoins, worth about $460 million at the time, had disappeared with it. The price did not climb back above its 2013 high until February 2017.

The year bitcoin went mainstream

2013 was the first year ordinary investors piled in. In March, the Cyprus banking crisis, in which savers faced losses on their deposits as part of a bailout, was widely cited by traders as a reason to hold money outside the banking system. The same month the US Treasury's financial crimes unit, FinCEN, issued its first guidance on virtual currencies, treating exchanges as money transmitters, the category that covers firms like Western Union.

The first crack came in April. On 10 April the price on Mt. Gox spiked to $266 and then fell to about $105 within hours, Bitcoin Magazine reported. Mt. Gox's trading engine could not keep up with the volume of orders. The exchange said trade counts had tripled in a day and halted trading for about 12 hours on 11 April. Its problems kept coming. On 14 May the US Department of Homeland Security seized money from an account belonging to a Mt. Gox subsidiary at the payments firm Dwolla, accusing it of operating as an unlicensed money transmitter. Between May and August, Homeland Security took about $5 million from Mt. Gox's US accounts. On 20 June Mt. Gox paused withdrawals in US dollars. It said they resumed in July, but customers reported waits of weeks and months.

Then the rally restarted, this time led by China. BTC China grew into the largest bitcoin exchange in the world by trading volume. On 18 November the US Senate held its first hearing on virtual currencies, and the Federal Reserve chairman, Ben Bernanke, wrote to senators that they "may hold long-term promise". The price on Mt. Gox jumped to $900 that day. Eleven days later it passed $1,200.

There was another force behind that run. A 2018 study in the Journal of Monetary Economics by Neil Gandal, JT Hamrick, Tyler Moore and Tali Oberman found that two automated accounts on Mt. Gox, known as Markus and Willy, recorded purchases of about 600,000 bitcoins in 2013 without paying for them, and that the price rose on average by about 4% on days when they traded. A trading bot is a program that places orders automatically. These two appear to have been buying with money that did not exist.

China pulls the plug

On 5 December 2013 the People's Bank of China, the country's central bank, and four other agencies issued a notice barring banks and payment companies from handling bitcoin. Individuals could still trade it at their own risk. It was the equivalent of a regulator telling every bank and card processor in the country to stop serving one market.

The effect took two weeks to land. Payment processors were told to stop working with bitcoin exchanges, and on 18 December BTC China announced it could no longer accept deposits in yuan. Its chief executive, Bobby Lee, said he suspected the rumours were true and that payment firms had been told not to do business with his company. The Associated Press reported that the price fell from about $618 to as low as $412 that day.

Mt. Gox goes dark

The final blow came from the exchange that had been wobbling all year. Mt. Gox was run by Mark Karpelès, a French programmer based in Tokyo. On 7 February 2014 it halted all bitcoin withdrawals, blaming a flaw in the way Bitcoin transactions were identified. On 24 February its website went blank. On 28 February it filed for bankruptcy protection in Tokyo, saying about 850,000 bitcoins were missing, about 750,000 belonging to customers. A month later it said it had found about 200,000 of them in an old wallet, the digital equivalent of a forgotten safe.

For customers it was like a stockbroker vanishing with clients' shares. There was no deposit insurance and no compensation scheme.

The slide ran through 2014. In early January 2015 hackers stole almost 19,000 bitcoins, about $5 million, from Bitstamp, by then one of the largest remaining exchanges, which suspended trading for several days. On 14 and 15 January 2015 the price fell to about $177, its lowest since 2013, according to Scripps News.

Three years in the cold

For most of 2014 and 2015 bitcoin was a punchline. Newspapers ran obituaries for it. Many of the businesses built in the boom closed. The ones that survived were the exchanges and wallet companies that kept customers' coins separate from their own and could prove they held them. The lesson Mt. Gox customers learned the hard way became a slogan: "not your keys, not your coins", meaning that coins left on an exchange belong, in practice, to the exchange.

Bitcoin passed its 2013 high again on 24 February 2017, about three years and three months after the peak. Ten months later it was close to $20,000.