The 10-year "Mentougou" Mt. Gox saga is nearing its end, with 140,000 BTC selling pressure coming?

Author: Tuo Luo Finance

The "Mt. Gox" incident, which lasted for 10 years, is finally coming to an end.

In the early hours of May 28, the Mt. Gox wallet, which had been declared bankrupt for 10 years and had been inactive for 5 years, showed unusual activity, making 10 transactions to an unknown address, transferring 141,685 bitcoins, worth up to $9 billion at market price. Market news suggests that this is a preliminary preparation for the compensation of Mt. Gox creditors, which caused BTC prices to drop by 3%, falling below $68,000.

After a prolonged dispute, creditors are once again approaching a satisfactory outcome, but the market seems to be facing invisible pressure.

01. Review of the Mt. Gox Incident: A One-Man Show that Crashed the Bull Market

If one has a slight understanding of cryptocurrency history, Mt. Gox is undoubtedly well-known. It can be considered one of the biggest Waterloo moments in Bitcoin's history and also the end of the 2013 bull market.

Mt. Gox was headquartered in Tokyo, Japan, and was built by Jed McCaleb in 2010. It was later acquired in 2011 by French developer and Bitcoin enthusiast Mark Karpeles, becoming a trading platform focused on Bitcoin. At that time, Bitcoin was in its infancy, and trading platforms were very scarce, allowing the relatively formal and large-scale Mt. Gox to grow significantly.

In 2013, the price of Bitcoin skyrocketed from $13 to $1,100. During this unprecedented bull market, Mt. Gox quickly became the world's largest Bitcoin trading platform, at its peak controlling 70% of the Bitcoin trading market share.

However, on February 7, 2014, this powerful exchange suddenly announced a halt to all Bitcoin withdrawals. At that time, the platform claimed it needed to sort out its currency processes, so users did not pay much attention. But just 17 days later, the exchange not only suspended all trading but also made its website inaccessible. Soon, this unusual behavior caused panic in the market.

A leaked internal company document revealed a bloody truth: hackers had attacked Mt. Gox, stealing 744,408 bitcoins from Mt. Gox customers, as well as an additional 100,000 bitcoins owned by the company, totaling 840,000 bitcoins, worth about $450 million at the time. Such a large-scale attack was not an isolated incident; as early as 2011, Mt. Gox had been hacked multiple times, and before 2011, it had already lost as many as 80,000 bitcoins. However, due to the rapid rise in Bitcoin prices, the company managed to cover up the losses. This three-year-long theft ultimately led to the company's downfall.

On February 28, Mt. Gox filed for bankruptcy in Japan, and two weeks later, it filed for bankruptcy protection in the United States. The incident shook the cryptocurrency market, causing the price of Bitcoin to plummet from $951 to $309, a direct drop of two-thirds, and the Bitcoin market faced another trust crisis, with a large number of users embarking on a difficult path to protect their rights.

In fact, even now, the market still does not know the full story behind the Mt. Gox hacking incident. There are theories of internal theft, external intrusion, and collusion, but the core issue is that such a large amount of Bitcoin has not been fully recovered to this day. The then-CEO of Mt. Gox, Karpeles, was charged with fraud and embezzlement in early 2015. Before going to prison, he claimed to have found 200,000 missing bitcoins, which he stored in a cold wallet, but subsequent tracking of the wallet revealed that the bitcoins had been distributed to 100 different wallets after a series of operations.

By 2019, Mt. Gox had recovered 141,000 bitcoins, which were ordered by the court to be held in trust, with Nobuaki Kobayashi as the trustee coordinating the distribution to creditors. According to Mt. Gox's 2019 balance sheet, the debtor held approximately 142,000 BTC, 143,000 BCH, and 69 billion yen (about $510 million at the time).

In 2019, Bitcoin had already risen to nearly $10,000, and creditors were more sensitive to the distribution timeline and plan, causing the compensation process to be prolonged. In 2022, Mt. Gox announced that its Bitcoin repayment program had been accepted by the court, and the specific distribution method was disclosed in 2023.

This year, in January, creditors disclosed emails stating that they had registered their payment addresses at the beginning of the year, and Mt. Gox would unlock 140,000 bitcoins in the next two months for creditor payments.

The long-awaited compensation finally reached its conclusion, which should have been a good thing, but the market reacted with panic to this news.

02. Is There a Selling Pressure from 140,000 BTC? Not Quite

140,000 bitcoins, at current prices, amount to $9 billion. Does this compensation mean huge selling pressure? It is precisely because of this news that Bitcoin quickly fell below $68,000.

However, analyzing the reality, the possibility of a large-scale drop is minimal. First, while 140,000 bitcoins may seem like a large amount, in the current institution-dominated Bitcoin market, it is not entirely unabsorbed. For example, Grayscale has been the largest short seller of Bitcoin since the approval of the Bitcoin spot ETF. Before April, Grayscale's GBTC sold an average of about 7,000 BTC per working day, and during the intense selling in January, the daily selling volume even reached 10,000 BTC, continuing for two weeks. As of now, Grayscale's GBTC has sold a total of 332,000 BTC, with a historical net outflow of $17.746 billion. But the result is evident: Bitcoin has continued to rise from $40,000 to $67,000.

Comparison of Grayscale GBTC and BlackRock IBI Bitcoin Holdings, Source: IBIT

More importantly, even if there is compensation and selling, it is not an overnight process. According to the 2023 Mt. Gox official announcement, the compensation plan offered to creditors includes basic compensation and proportional compensation. The basic compensation part allows each creditor to claim the first 200,000 yen to be paid in yen, while the proportional compensation provides creditors with two flexible options: "early one-time repayment" or "mid-term repayment and final repayment." Among them, the one-time repayment can only receive partial compensation, and for amounts exceeding 200,000 yen, creditors can choose a mix of BTC, BCH, and yen or pay the full amount in fiat currency. Choosing mid-term and final repayments will yield a larger compensation amount but may take years. The payment methods also offer options for cash and cryptocurrency.

Overall, Mt. Gox has considered the risks of concentrated dumping and adopted a decentralized compensation approach, proposing a coin-to-coin payment option. The former CEO of Mt. Gox has also clarified that there will not be an immediate sale of Bitcoin.

Additionally, even with concentrated compensation, the selling pressure would be much less than the actual total amount. Due to the long duration of Mt. Gox, many creditors had previously bundled their claims and sold them to funds, so the main body of the bonds is mostly institutions. According to last year's data, only 226 claimants held more than 50% of the claims against Mt. Gox. In the current bullish market, neither institutions nor retail investors would easily sell their BTC.

But is there no impact at all? Not necessarily. In the current liquidity-starved market, panic can quickly lead to price declines. The current compensation deadline is set for October 31, 2024, and before the compensation date, there will still be ongoing selling pressure, which will bring down market sentiment, but in the long run, it will not cause the significant drop that is imagined.

03. Compared to Mt. Gox, Politics is the Key Issue

Compared to the annual "wolf is coming" scenario of Mt. Gox, perhaps politics is a more long-term topic of concern for cryptocurrency.

Recently, both Biden and Trump have been active regarding cryptocurrency voter outreach. Trump first declared that he would ensure cryptocurrency is created in the U.S. and called for the release of Julian Assange and the founder of Silk Road. Following this, reports emerged that President Biden's re-election campaign team plans to attract cryptocurrency voters' support by promoting innovation.

In the closely contested party competition, cryptocurrency voters may have gained a more important status than ever before. According to a recent survey by Grayscale of 1,768 adults planning to vote, due to geopolitical tensions, inflation, and dollar risks, voter interest in Bitcoin has significantly increased (41% vs. 34% in November 2023). Nearly one-third of voters (32%) indicated that they are more willing to learn about cryptocurrency investments or actually invest in cryptocurrencies since the beginning of this year. The survey results show that support for cryptocurrencies does not significantly lean towards any one political party.

In this tug-of-war game, cryptocurrencies have become the underlying winners. Cathie Wood, known as "Wood the Great," clearly stated in an interview that the approval of the Ethereum ETF application is because cryptocurrencies have become an election issue. The U.S. Deputy Secretary of the Treasury also rarely commented on mixers, stating that the goal is not to ban mixers but to increase transparency and find a balance between privacy and national security.

Currently, all market institutions are paying attention to the progress of the FIT21 bill's approval. If passed, it would mean a further relaxation of the U.S. regulatory attitude towards cryptocurrencies. As long as no issuer or related party controls 20% or more of a cryptocurrency, it will be classified as a commodity, thus lifting the SEC's restrictions on securities. This would open a new era in the cryptocurrency field. Lynn Martin, president of the New York Stock Exchange, also stated at the Consensus conference that if regulations become clearer, the NYSE would consider opening cryptocurrency trading. If this happens, the threshold for purchasing cryptocurrencies will increasingly lower.

Of course, the usually tough SEC Chairman Gary Gensler is quite dissatisfied with this, having publicly stated multiple times that the bill has significant issues. However, "small arms can't twist big legs" is indeed happening in reality. Although, based on current information, due to the fixed terms of independent agency appointees, which are not determined by a single president, the SEC chairman is likely to serve until February 2025, the current situation indicates that regardless of which party comes to power, the relaxation of U.S. regulation has already become a foreseeable fact.

Currently, lobbying organizations for cryptocurrencies are still working hard. Ripple donated another $25 million to the cryptocurrency super PAC Fairshake yesterday, bringing the total donations of this PAC close to $100 million before the elections in November this year.

Whether $100 million can sway the situation remains uncertain, but it is quite interesting that institutions once looked down upon retail investors and held a superior attitude, yet in the end, it was the so-called retail investors who gathered sand to form a tower, becoming a key step in determining the direction of cryptocurrency. This is another form of decentralized victory, isn't it?