Bitcoin: Mt. Gox Dump Rumors Exaggerated, But No Lessons (Cryptocurrency:BTC-USD)

The article below looks at where the infamous Mt. Gox bankruptcy stands, as well as the renewed rumors that the rehabilitation plan could negatively affect the prices of Bitcoin (BTC-USD) and Bitcoin Cash (BCH-USD). In addition to the strength of the past of a simple HODL strategy, highlights Mt. Gox discussion also two options for digital asset investments more generally:

• The high relative value of a blockchain’s majority chose fork
• Good custodial arrangements include cold storage and proof of reserve audits

But before you move to Mt. Gox, it is useful to keep in mind that macroeconomic factors currently overshadow any fundamental analysis. Tuesday’s release of the CPI for August proved again that the interest rate and expectations for interest rate policy are the most short-term drivers in the digital asset area. After the release, Bitcoin prices immediately fell by $1,300, close to 6%. And even with The Merge looming, Ethereum (ETH-USD) fell over 7%.

The headline month-over-month inflation figure came in at a cool 0.1% with the key petrol component down 10.6% for the month. Growth in food prices remained high at 0.7%, although the rate has moderated compared to 13.5% on an annual basis. However, the core prices overwhelmed to the high side. All goods less food and energy rose 0.6% in August. This was double the July rate, which many market participants had seen as a positive pivot from the extremes of the second quarter. Among the core readings, shelters and medical services stood out for their high and growing increase.

The result is that only the most optimistic of Fed supervisors are now still hoping for a 0.5% hike at next week’s FOMC meeting. And as of Wednesday, CME futures pointed to a 70% probability of a 0.75% increase in the federal funds rate. Interestingly, the other 30% is the probability of a historical full points increase. It is important that higher interest rate expectations continue to affect the interest-sensitive technology sector and risk assets.

Mt. Gox Collapse and Rehabilitation

Mt. Gox was a digital asset marketplace launched in 2010. When it collapsed in February 2014, it was responsible for an estimated 70% of Bitcoin trading worldwide. That month, the company revealed that it had lost about 750,000 of its customers’ Bitcoins worth at the time between $400 and $500 million. It is believed that 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 cases and several lawsuits regarding Mt. Gox’s assets. The addressable assets, which are controlled by a trustee, now primarily consist of 100,000 to 150,000 Bitcoins, yen worth about $500 million, and a relatively small amount of Bitcoin Cash.

Of course, during this period, Bitcoin prices have gone from a few hundred dollars per coin to almost $20,000. And while it gets complicated, it now seems that the majority of victims, despite the significant hacks, will be compensated 5-6 times the value of their Bitcoin investments around the point of Mt. Gox’s withdrawal halt and bankruptcy filing. For perspective, this will be a tip return of the Nasdaq Composite in the same period.

Bitcoin Dump and Slump Speculation

Thursday, September 15 was an important date for Mt. Gox rehabilitation, by starting a period of no claim transfers ahead of a first basic payment for most creditors. This deadline had the de facto effect of limiting the ability to submit or update claims. And it represents a milestone in the timeline towards payouts.

Each milestone in the process has led to 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 are still prominent in the media. For reference and simplified, a round figure 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 in ‘reasonable rate’ as Bitcoin Dump Fears Spook Market, decrypt.co, September 1, 2022

Mt. Gox Creditors Inch Closer to Payback as Bitcoin Dump Looms, bloomberg.com, July 7, 2022

Mt. Gox Bitcoin Black Swan Event: BTC Price Faces $3B in Selling Pressure as Refunds Begin, capital.com, August 23, 2022

and these headlines from a previous rehab 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 Approach, reuters.com, 11/18/2021

The headlines above are hyperbolic FUD. Bitcoins per day, legitimate trading volume is highly contested. But Forbes recently estimated it at $128 billion, and respected researchers and market participants estimate it at $25-35 billion per day. Recall from above, the total value of Mt. Gox’s Bitcoins are around $3 billion, a meaningful but small proportion of a single day’s trading.

But most importantly, the position will not be terminated immediately or in its entirety. Creditors may take the largest share of the rehabilitation payout in kind, and a significant number of these creditors are likely to hold onto a portion of the coins rather than immediately liquidate. Furthermore, a meaningful percentage of the coins are unclaimed or have unresolved claims or lawsuits pending. It’s complicated, but multiple repayments are also expected to be further split into different tranches for different choices. The recent trustee communication explained only one of these cases.

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 awarding etc. of rehabilitation claims, mtgox.com, 31 August 2022

The feared dump highlighted in the headlines above will likely never materialize or ever be noticed in actual trading volume.

Mt. Gox: Lessons for Crypto Investing

In August 2017, well after the collapse of Mt. Gox, differences of opinion within the Bitcoin community led to the blockchain splitting into 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 worth $17 million, a relatively low amount compared to the Bitcoin holdings discussed above.

The chart above shows the percentage change in value of Bitcoin and Bitcoin Cash since they were issued. Interestingly, the slower, more energy-intensive Bitcoin is generally believed to have won out over Bitcoin Cash because it was perceived as more secure. Put differently, Bitcoin won the branding war.

Recognizing that there has generally been a “winner” and “loser” over time is important. We’ve seen something similar but technically different with Ethereum and Ethereum Classic (ETC-USD) in the past. And investors in the crypto space may face other decision points in the coming months from this week’s merger 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 garner continued interest in the weeks following The Merge. Specifically, recent months have seen plans to continue a proof-of-work chain similar to 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 is likely to play the key role in valuation in the longer term. In this case, Ethereum has the greatest support from most of the influential developers, including Vitalik Buterin, as well as support from various sector institutions. So Ethereum should appreciate significantly relative to its alternative forks over time.

The other obvious lesson from Mt. Gox is that good custody arrangements include cold storage and quality audits. It is believed that the hackers took the coins from Mt. Gox hot wallet and that a stock 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 in owning and storing Bitcoin, as they are more opaque, require trust, and are a point of weakness from a decentralized and permissioned perspective.

Whether you participate through a digital asset marketplace or buy an exchange-traded product, look to the custody arrangements with respect to storage and audits. As a starting point for due diligence, consider Kraken’s evidence of reserve audits and Coinbase (COIN) vaults.

Takeaway and Bitcoin Rating

Mt. Gox rehabilitation demonstrates a simple Bitcoin HODL strategy that has proven highly successful over the past eight years. This despite the current crypto cold and depressed prices.

However, steady growth in energy and food prices along with a now stubborn core inflation is continuously driving the Fed to further large interest rate hikes. These pressures continue to weigh on the interest rate-sensitive technology sector and risk on assets.

I have been wrong this year about the tenacity of inflation and surprised by the Fed’s willingness to react forcefully and repeatedly. That said, there are some reasons to believe a Fed pivot to smaller hikes is imminent. With my dovish Fed outlook, along with the significant correction in the second quarter and the fact that Bitcoin is a long-term hold, I maintain my buy rating here.