The article below examines the status of Mt. Gox’s infamous bankruptcy as well as renewed rumors that its rehabilitation plan could negatively impact the prices of Bitcoin (BTC-USD) and Bitcoin Cash (BCH). -USD). In addition to the past force From a simple HODL strategy, the discussion on Mt. Gox also highlights two takeaways for investing in digital assets more broadly:
- The high relative value of the range chosen by the majority of a blockchain
- Sound custodial arrangements include cold storage and proof of reserve checks
But before moving on to Mt. Gox, it’s worth bearing in mind that macro factors currently overshadow any fundamental analysis. The Tuesday release of August CPI again, interest rates and interest rate policy expectations are the major near-term drivers in the digital asset space. After the release, Bitcoin prices immediately fell $1,300, or almost 6%. And even with the impending merger, Ethereum (ETH-USD) has fallen over 7%.
The headline month-on-month inflation figure was 0.1%, with the key gasoline component down 10.6% for the month. Food price growth remained very high at 0.7%, although the rate moderated from an annualized 13.5%. However, the basic prices reached the high level. All items less food and energy rose 0.6% in August. That was double the July rate, which many market participants viewed as a positive pivot from the extremes of the second quarter. Among the core readings, accommodation and medical care services stood out for their high and growing rate of increase.
As a result, only the most bullish Fed watchers now hold out hope for a 0.5% hike at next week’s FOMC meeting. And since Wednesday, CME Futures Contracts pointed to a 70% chance of a 0.75% increase in the federal funds rate. Interestingly, the other 30% probability corresponds to a historical increase of a full point. Importantly, higher rate expectations continue to hurt the interest-rate sensitive technology sector and risky assets.
Collapse and rehabilitation of Mount Gox
Mt. Gox was a digital asset market launched in 2010. At the time of its collapse in February 2014, it was responsible for approximately 70% of Bitcoin trading worldwide. That month, the company revealed that it had lost around 750,000 Bitcoins from its customers worth between $400 million and $500 million. These coins are believed to have been stolen via hacks over a period of time, possibly in 2011 and 2012.
Since 2014, there have been complicated bankruptcy and rehabilitation proceedings and multiple lawsuits involving the Mt. Gox assets. The addressable assets, which are controlled by a fiduciary, now mainly consist of 100,000 to 150,000 Bitcoin, yen worth around $500 million, and a relatively small amount of Bitcoin Cash.
Of course, over this period Bitcoin prices have gone from a few hundred dollars a coin to nearly $20,000. And while it gets complicated, it now seems likely that the majority of victims, despite the substantial hacks, will be compensated 5-6 times the value of their Bitcoin investments when Mt. Gox freezes withdrawals and files for bankruptcy. For perspective, this would swing the Nasdaq Composite back to the same timeframe.
Bitcoin Dump and Collapse Speculation
Thursday, September 15 was an important date for Mt. Gox’s rehabilitation in that it began a period of claims-free transfers in anticipation of a first base payment for most creditors. This delay had the de facto effect of limiting the possibility of making or updating claims. And this represents a significant milestone in the payment timeline.
Each step of the process has sparked speculation that the eventual payouts will lead to a large-scale sale of Bitcoins by the trustee to raise funds or by creditors, once the Bitcoins are returned to them. These speculations remain prominent in the media. For reference and simplicity, a round number for the total value of these Bitcoins is $3 billion and creditors can take cash or a combination of cash and coins.
Consider the following recent headlines:
Mt. Gox Refund Comes ‘Timely’ as Bitcoin Dump Fear Ghost Marketdecrypt.co, September 1, 2022
Mt. Gox creditors move closer to repayment as Bitcoin dump loomsbloomberg.com, July 7, 2022
Mt. Gox Bitcoin Black Swan Event: BTC Price Faces $3 Billion Selling Pressure As Redemptions Begincapital.com, August 23, 2022
and these titles from a previous rehabilitation stage:
Bitcoin investors tremble in fear as Mt. Gox prepares to dump 141,000 BTCfxstreet.com, 17/11/2021
Bitcoin Heads For Worst Week In Months As Mt Gox Payouts LoomReuters.com, 11/18/2021
The titles above are hyperbolic FUDs. The volume of legitimate Bitcoin trades per day is highly disputed. But Forbes recently put it at $128 billion and respected researchers and market players put it between $25 billion and $35 billion a day. Recall above, the total bitcoin value of Mt. Gox is around $3 billion, a significant but small part of a single day’s trade.
Importantly, the position will not be liquidated all at once or in its entirety. Creditors may take the largest share of the rehabilitation payment in kind and a significant number of these creditors will likely hold a portion of the coins rather than liquidate immediately. Additionally, a significant percentage of coins are unclaimed or have unresolved claims or pending lawsuits. It’s complicated, but multiple refunds should also be split into different installments for different choices. The recent communication from the administrator explained only one of these cases.
If repayments will be made with cash from the sale of cryptocurrency by the pardon trustee, a repayment date different from the repayment dates of other permitted pardon applications may be set with court permission because the sale of cryptocurrency can take a while. .
Information on the prohibition of assignment, etc. pardon applicationsmtgox.com, August 31, 2022
The dreaded dump highlighted in the headlines above will likely never materialize or be noticed in actual trading volume.
Mt. Gox: Lessons for Investing in Crypto
In August 2017, long after the collapse of Mt. Gox, differences of opinion within the Bitcoin community led the blockchain to branch off into two branches, Bitcoin and Bitcoin Cash. Mt. Gox held before and during this important fork and therefore has plays on both channels. Today, Mt. Gox’s Bitcoin Cash is worth $17 million, a relatively small amount compared to the Bitcoin holdings discussed above.
The chart above shows the percentage change in value of Bitcoin and Bitcoin Cash since their forking. Interestingly, the slower, more energy-intensive Bitcoin is widely believed to have taken over from Bitcoin Cash, as it was perceived to be safer. Simply put, Bitcoin has won the brand war.
Recognizing that there has generally been a “winning” and “losing” range over time is important. We have seen something similar although technically different with Ethereum and Ethereum Classic (ETC-USD) in the past. And investors in the crypto space may face more decision points in the coming months from this week’s meltdown on the Ethereum platform.
Beyond what might be called the main new Ethereum proof-of-stake chain, there will likely be one or two more branches to generate continued interest in the weeks following the merger. Specifically, the past few months have seen plans to pursue a proof-of-work chain much like Ethereum Classic. Of course, the initial valuation of these chains will dictate their balance against Ethereum over time. But as with Mt. Gox Bitcoin Cash coins, market perception will likely play a key role in longer-term valuation. In this case, Ethereum has the strongest support from most influential developers, including Vitalik Buterin, as well as support from various institutions in the industry. Ethereum should therefore significantly appreciate against its alternative forks over time.
The other obvious lesson from Mt. Gox is that sound custodial arrangements include cold storage and quality audits. The hackers are believed to have taken the coins from the hot wallet of Mt. Gox, and an exchange listener was ironically one of many weak points.
Bitcoin’s value comes from its decentralized, permissionless, and transparent ledger that operates in a trustless environment. Digital asset markets and other third-party intermediaries make it harder to own and store Bitcoin because they are more opaque, require trust, and are a point of weakness from a decentralized and authorized perspective.
Whether you are participating in a digital asset market or buying an exchange-traded product, review custodial agreements as they relate to storage and audits. As a starting point for due diligence, consider Kraken Reserve Proof Audits and Coinbase (COIN) skip.
Takeaway and Bitcoin note
The rehabilitation of Mt. Gox demonstrates that a simple Bitcoin HODL strategy has proven to be very successful over the past eight years. This despite the current crypto cold snap and depressed prices.
However, entrenched growth in energy and food prices and now stubborn underlying inflation are continually pushing the Fed into further significant rate hikes. This pressure continues to depress the interest-rate sensitive tech sector and risky assets.
I was wrong this year on the stickiness of inflation and surprised by the willingness of the Fed to react forcefully and repeatedly. That being said, there is reason to believe that a Fed pivot to smaller hikes is approaching. Given my dovish Fed outlook, alongside the substantial Q2 correction and Bitcoin being a longer-term hold, I’m maintaining my buy rating here.