Every industry has some “ghost” stories about what happens when something goes wrong.
Pets.com fell apart when the Internet bubble crashed.
The delorean quickly became a laughing stock.
And with cryptocurrency, Mt Gox was hacked, leaving almost $500 million (in 2014) gone.
This article is the Mt. Gox hack explained, one that will help you understand what happened and make it so we don’t repeat this mistake again.
MAGIC THE GATHERING TURNS BITCOIN
It started in 2006, when Jeb MCaled (who you may know from Ripple) wanted to build a website for players of Magic: The Gathering Online.
This site would allow players to trade cards like stocks in an online exchange.
Although, after beta development in 2007 he turned to releasing a different url later in 2009 called The Far Wilds (his own card game).
Then came July 2010, when Jeb learned about Bitcoin on slashdot and realized the potential.
He could use the same trading framework for an exchange of this new “cryptocurrency.”
On July 18th Mt. Gox exchange was unleashed onto the web.
MARK KARPELES ACQUIRES MT. GOX
Come march of 2011, Jeb realized that the site was best not in his hands, and that’s when Mark Karpeles enters the picture.
Karpeles took on the site in order to take it to the next level, although, time would tell.
The First Hack Occurs:
Only 4 months after Mark Karpeles becomes the leader of Mt. Gox the first hack happens.
After a hacker, allegedly logged onto an auditor’s computer from Mt Gox, he then transferred a large amount of Bitcoins to himself.
This dropped the price of all Bitcoin to about $.01
Although, the price then bounced back, only affecting large accounts.
Yet this is only one mishap that continued to shape the Mt. Gox ecosystem lead by Mark Karpeles.
Later that year about 2,609 BTC were sent to invalid addresses with no keys, meaning these BTC were lost forever.
Continued Faults and Missing Coins:
As time continued, there would be a trend of bad management and missing coins.
In February, 2013 Dwolla (online ecommerce/payment system) temporarily restricted some accounts going to Mt. Gox.
This resulted in canceled withdrawals and missing BTC, that eventually were recovered and rightfully returned.
Although, with a warning “Please be advised never to cancel any Dwolla withdrawals from us again.”
Then in March, the Bitcoin transaction log temporarily forked, causing Mt. Gox to briefly halt deposits.
This lead to a price decrease of 23% before recovering after deposits were back.
With April, came news that Mt. Gox exchange was the biggest Bitcoin exchange, handling over 70% of all transactions.
This lead to them closing their doors for 2 days for a “market cooldown” which dropped the price to $55 before restabilizing at about $100.
And May brought about:
- A $75 million lawsuit from CoinLab for allegedly breaching their contract
- The US Department of Homeland Security to issue a warrant seizing money from their subsidiary account with Dwolla
In June of 2013 they obtained their money services business license from Fintech. They then briefly suspended withdrawals at the end of June until beginning of September.
All in all you can see a trend…
Something was coming, and while this was the first cryptocurrency exchange to become as large as fast as it did, there were too many missteps.
Poor management, missing funds, and more plagued the community.
Leading to the point we are all waiting for.
THE MT. GOX HACK EXPLAINED
In late 2013 Mt.Gox was written up in Wired magazine as users had TO wait weeks, sometimes months, to pull out their funds.
Although, the worst was yet to come.
On February 7th 2014, Mt Gox halted all withdrawals.
On the 17th of February, other exchanges resumed withdrawals (as it was a bug in Bitcoin code) while Mt.Gox stayed closed.
Then on the 20th with withdrawals still halted, protesters started making Mt. Gox move their offices.
On the 23rd of February, Mark Karpeles withdrew from his seat on the board of the Bitcoin Foundation.
On the 24th the site went offline, trading stopped, and an internal document was leaked – 744,408 Bitcoin were missing.
During this time Bitcoin dropped by over 36% of its total value.
Bankruptcy and The Hack:
It wasn’t until February 28th that Mt. Gox finally filed for bankruptcy.
The company claimed to have lost over 750,000 of its customers Bitcoins and 100,000 of its own Bitcoin.
Which at the time was around 7% of all Bitcoin.
On March 20th 2014 as a testament to its mismanagement and poor structure, they claimed to have found $114 million of Bitcoin in an old digital wallet.
Bringing the total loss from 850,000 to 650,000.
After Tokyo Wizsec security company did some digging they found that a majority of the coins were stolen over time from Mt Gox’s hot wallet.
In August of 2015 Mark Karpeles was arrested being charged with fraud and embezzlement.
After interrogation they found that Mark, himself, had stolen $2.6 million worth of BTC moving it to his own personal account.
As of today Mark Karpeles may get almost $1 billion returned to him and not the people who lost money, via continuous legal actions.
This was a careless loss of so many valued Bitcoins.
One that made the system resilient no doubt, but one that didn’t need to occur.
HOW TO PREVENT AND SAFEGUARD YOURSELF FOR THE FUTURE
Here’s the problem.
Shit happens and sometimes you can’t stop it.
Although, prepare for the worst and hope for the best.
The same can be said with this situation.
There are a few preventive measures anyone can take in order to not have this happen to them (losing their money by hacking on an exchange).
- Make sure the exchange you are using is reputable
- Do not keep your funds stored on the exchange
- Use cold wallet storage to keep you funds safe
- Don’t give out private keys
It pays to safe guard your BTC and various cryptocurrencies.
As of today the amount lost (650,000 BTC) is equal to $7.5 billion.
Let’s make sure that never happens again.
In order to store your cryptocurrency securely, check out our free guide by clicking the button below.
Thanks for reading,
The GCA Team
Want to learn how to buy and store Bitcoin safely? We’ll send you our free guide through Facebook Messenger below: