The article below looks at where the infamous Mt. Gox bankruptcy stands as well as the renewed rumors that its Rehabilitation Plan could negatively impact Bitcoin (BTC-USD) and Bitcoin Cash (BCH-USD) prices. In addition to the past strength of a simple HODL strategy, the Mt. Gox discussion also highlights two takeaways for digital asset investments more broadly:
- The high relative value of a blockchain’s majority chosen fork
- Sound custody arrangements include cold storage and proof of reserves audits
But before moving to Mt. Gox, it is useful to keep in mind that macroeconomic factors currently overshadow any fundamental analysis. Tuesday’s release of the August CPI again proved interest rates and interest rate policy expectations are the majority shorter-term drivers in the digital asset space. Following the release, Bitcoin prices immediately tanked by $1300, close to 6%. And even with The Merge impending, Ethereum (ETH-USD) dropped over 7%.
The headline month-over-month inflation number came in a cool .1% with the key gasoline component down 10.6% for the month. Growth in food prices remained highly elevated at .7%, though the rate has moderated relative to the 13.5% annualized. However, core prices stunned to the high side. All items less food and energy rose .6% in August. This was twice the July rate, which many market participants had looked to as a positive pivot from the extremes of the second quarter. Among the core readings, shelter and medical care services stood out for their high and rising rate of increase.
The upshot, only the most optimistic of Fed watchers now remain hopeful of a .5% increase at next week’s FOMC meeting. And as of Wednesday, CME futures pointed to a 70% probability of a .75% raise in the federal funds rate. Interestingly, the other 30% probability is for a historic full point increase. Importantly, higher rate expectations continue to batter the interest rate sensitive tech sector and risk-on assets.
Mt. Gox Collapse and Rehabilitation
Mt. Gox was a digital asset marketplace launched in 2010. By the time of its collapse in February of 2014 it was responsible for an estimated 70% of the Bitcoin trade worldwide. That month the company revealed it had lost about 750,000 of its customers’ Bitcoins worth at the time between $400 and $500 million. It is believed these coins were 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 concerning Mt. Gox’s assets. The addressable assets, which are controlled by a trustee, now primary consists of 100,000 to 150,000 Bitcoins, yen worth about $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 though it gets complicated, it now looks likely the majority of the victims, despite the substantial hacks, will be compensated 5-6 times the value of their Bitcoin investments around the point of Mt. Gox’s withdrawal freeze and bankruptcy filing. For perspective, this would be tipple the return of the Nasdaq Composite over the same period.
Bitcoin Dump And Slump Speculation
Thursday, September 15th was an important date for the Mt. Gox rehabilitation in that is started a period of no claims transfers in the leadup to a first base payment for most creditors. This deadline had the de facto effect to limit the ability to make or update claims. And it represents a milestone in the timeline toward payouts.
Each milestone in the process has brought speculation that the eventual payouts would lead to a large scale sale of Bitcoins by the trustee to raise funds or by creditors, once Bitcoins are returned to them. These speculations remain prominent in the media. For reference and simplified, 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 Repayment Coming in ‘Due Course’ as Bitcoin Dump Fears Spook Market, decrypt.co, September 1, 2022
Mt. Gox Creditors Inch Closer to Repayment as Bitcoin Dump Looms, bloomberg.com, July 7, 2022
Mt. Gox Bitcoin black swan event: BTC price facing $3bn of sell pressure as refunds begin, capital.com, August 23, 2022
and these headlines from a prior rehabilitation milestone:
Bitcoin investors shake with fear as Mt. Gox prepares to dump 141,000 BTC, fxstreet.com, 11/17/2021
Bitcoin heads for worst week in months as Mt Gox payouts loom, reuters.com, 11/18/2021
The headlines above are hyperbolic FUD. Bitcoin’s per day, legitimate trading volume is highly contested. But Forbes recently estimated it at $128 billion and respected researchers and market participants place it at $25-$35 billion per day. Recall from above, the total value of Mt. Gox’s Bitcoins is about $3 billion, a meaningful but small share of a single day’s trade.
But importantly, the position will not be liquidated at once or in its entirety. Creditors can take the largest share of the rehabilitation payout in kind and a substantial number of these creditors will likely hold a portion of coins rather than immediately liquidate. Further, a meaningful percentage of the coins are unclaimed or have unresolved claims or lawsuits pending. It is complicated, but multiple repayments are also expected to be further split into different tranches for different choices. The recent trustee communication explained just one of these instances.
If repayments will be made with cash obtained from the sale of cryptocurrency by the Rehabilitation Trustee, a repayment date different from the repayment dates of other allowed rehabilitation claims may be set with the permission of the Court since the sale of the cryptocurrency may take some time.
Information on Prohibition of Assignment, etc. of Rehabilitation Claims, mtgox.com, August 31, 2022
The feared dump highlighted in the headlines above likely never materializes or can ever be noticed in actual trading volume.
Mt. Gox: Lessons For Crypto Investing
In August of 2017, well after the collapse of Mt. Gox, differences of opinion in the Bitcoin community led the blockchain to fork to two branches, Bitcoin and Bitcoin Cash. Mt. Gox was a holder before and during this prominent fork and therefore has coins on both chains. Today, Mt. Gox’s Bitcoin Cash is worth $17 million, a relatively low amount when compared to the Bitcoin holdings discussed above.
The chart above shows the percent change in value of Bitcoin and Bitcoin Cash since their forking. Interestingly, the slower, more energy intensive Bitcoin is generally thought to have won out over Bitcoin Cash because it was perceived to be more secure. Put differently, Bitcoin won the branding war.
Recognizing there has generally been a fork “winner” and “loser” over time is important. We have seen something similar though technically different with Ethereum and Ethereum Classic (ETC-USD) in the past. And crypto space investors may face other decision points in the coming months from this week’s merge on the Ethereum platform.
Beyond what one might call the main, new proof-of-stake Ethereum chain, there will likely be one or two additional branches to gain continued interest in the weeks following The Merge. Specifically, recent months have seen plans to continue a proof-of-work chain somewhat like Ethereum Classic. Of course the initial valuation of these chains will dictate how they fair compared to Ethereum over time. But as with Mt. Gox’s Bitcoin Cash coins, market perception will likely play the key role in the valuation longer-term. In this case, Ethereum has the largest support of most of the influential developers including Vitalik Buterin, as well as the backing of various sector institutions. So Ethereum should substantially appreciate relative to its alternative forks over time.
The other obvious lesson from Mt. Gox is that sound custody arrangements include cold storage and quality audits. It is believed the hacks took the coins from the Mt. Gox hot wallet and that an exchange auditor was ironically one of a number of weak points.
Bitcoin’s value is derived from its decentralized, permissionless and transparent ledger that operates in a trustless environment. Digital asset marketplaces and other third party intermediaries present a complication to owning and storing Bitcoin as they are more opaque, require trust and are a point of weakness from a decentralized and permissioned perspective.
Whether participating through a digital asset market place or purchasing an exchange traded product, look to the custody arrangements with regards to storage and audits. As a starting point for due diligence consider Kraken’s proof of reserves audits and Coinbase’s (COIN) vault.
Takeaway and Bitcoin Rating
The Mt. Gox rehabilitation demonstrates a simple Bitcoin HODL strategy proved highly successful over the past eight years. This is despite the current crypto cold snap and depressed prices.
However entrenched energy and food price growth along with a now stubborn core inflation are continually driving the Fed into additional large rate hikes. This pressure continues to depress the interest rate sensitive tech sector and risk-on assets.
I have been 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 are some reasons to believe a Fed pivot to smaller-sized hikes is approaching. Taking my dovish Fed outlook, alongside the substantial second quarter correction and the fact that Bitcoin is a longer-term hold, I am maintaining my buy rating here.