This book excerpt is taken from chapter 10 of Mark Hunter's "Ultimate Catastrophe: How Mt. Gox Lost Half a Billion Dollars and Nearly Killed Bitcoin," which will publish Nov. 27, and be available on Amazon.
With nobody willing to bail out MtGox, the Monday, 24 Feb. deadline imposed by the bankruptcy court rapidly approaching and the executives of the other top exchanges preparing to spill the beans on what was going down, [Mt. Gox CEO Mark] Karpelès went into the weekend knowing that he needed a miracle to save the company and his skin.
There was already talk of a class action lawsuit against him on Bitcoin forums, although he knew this would be the least of his worries if he couldn’t replace his customers’ deposits. Karpelès spent the weekend in dialogue with various individuals, including Charlie Shrem, who had been kicked off the Bitcoin Foundation board following his arrest on Jan. 26 on money laundering charges related to Bitcoin. The pair tried to think up a way to extricate Karpelès and Mt. Gox from the waves that threatened to engulf them. Every avenue failed, however, and late on Sunday the first domino fell:
Effective immediately, Mt. Gox has submitted their resignation from the board of directors. We are grateful for their early and valuable contributions as a founding member in launching the Bitcoin Foundation. Mt. Gox Co. Ltd. (Japan) held one of the three elected industry member seats. Further details, including election procedures, will be forthcoming.
Shrem lauded the resignation, saying that following "lengthy" conversations with Karpelès and the Mt. Gox team he predicted ‘good news on the horizon for people who have funds stuck on Mt. Gox’, leading to speculation that a takeover was in the offing. When CoinDesk reported the falling of the second and third dominos late on Sunday night, however, the potential for good news took a massive hit:
Mt. Gox has removed all posts from its official Twitter feed. Readers started noticing the missing tweets just a short time after CEO Mark Karpeles resigned his seat on the Bitcoin Foundation's Board of Directors.
Indeed, Karpelès had followed Mt. Gox off the Bitcoin Foundation board and the exchange had wiped its entire Twitter feed with no warning or reason given, sending Bitcoin forums into meltdown. Multiple theories were given for the wiping, ranging from a potential rescue and rebrand to the latest sign that the exchange was on the verge of collapse. A BitcoinTalk poll found that the majority of voters, 43%, believed that Mt. Gox was "dead in the water," while 35% believed that it would survive. As Monday dawned, Mt. Gox customers held their breath and waited.
At the same time as Karpelès and Shrem were trying Hail Mary phone calls to save Mt. Gox, Ryan Selkis was walking his dog when his phone notified him of an incoming email from bitcoin angel investor Ben Davenport. Davenport said he needed to talk to Selkis urgently about the Mt. Gox situation.
Selkis called him, where he was told something extraordinary: MtGox was short around 745,000 bitcoins. Selkis was initially dismissive, but Davenport said he had proof, which he emailed over. Once home, Selkis opened this email to find a document attached. It was the Crisis Strategy Draft. Selkis read through the document but found the stated losses so staggering he initially considered it a fake.
After all, everyone knew Mt. Gox was incompetent, but surely it hadn’t been that incompetent. However, after ringing around purported other recipients of the document and receiving vague non-answers as opposed to outright denials, Selkis realized that it was almost certainly true; Mt. Gox had lost nearly half a billion dollars worth of bitcoins, but worse, it hadn’t told anyone.
Selkis wasn’t sure what to do with the information, wondering if he should post the document in its entirety or seek more thorough clarification of its authenticity first. Should he even post it at all, given that it would mark the exchange’s death knell? Whatever he was going to do, he realized, he would have to do it soon.
Mt. Gox was due to post a company update in a matter of hours where it might try and once again reassure customers rather than telling them the truth. Alternatively, Karpelès could do a runner with what was left in the kitty. Selkis sold his bitcoin holdings, uploaded what he called the Crisis Strategy Draft and penned a hasty blog post under his pen name, Two-bit Idiot, reaffirming that the document was unverified but that he believed it to be true. Selkis signed off the post by saying:
This is catastrophic, and I am sorry to share this. I do believe that this is one of the existential threats to bitcoin that many have feared and have personally sold all of my bitcoin holdings through Coinbase. To do so, and not give you the same information, would be dishonest and immoral. I am a risk tolerant investor, but I believe this will be catastrophic for Bitcoin, both as a currency and as a fledgling industry. If this is a hoax, it is one that I am fully blindsided by. I fear, however, that it is not.
The blog post and the Crisis Strategy Draft flew around the Bitcoin community, leading to fervent debate about its merits. Selkis was praised and pilloried in equal measure, with a few hopefuls praying that MtGox would deny that the document was genuine and that the exchange hadn’t suffered anything like that level of loss. The numbers were breathtaking, too large for many to comprehend, with many simply in denial, and for a very good reason: it wasn’t just any old bitcoins that had gone missing, it was their bitcoins. The idea that their holdings might have been wiped out under the noses of the custodians was unthinkable for many, who clung to any slivers of hope they could rather than face that prospect.
Once again, Mt. Gox left an informational vacuum at the worst possible time, keeping the communication shutters firmly pulled down in the wake of the leaking of the Crisis Strategy Draft and leaving the Bitcoin and non-Bitcoin world to debate its content and merits. Naturally, the rumor mill went into overdrive, with Karpelès’ silence on Monday attributed to him having gone to ground with hundreds of millions of dollars in customer funds.
Those who had predicted Mt. Gox’s downfall waited for confirmation of the same, but the few that retained hope pointed to an interesting fact: the Crisis Strategy Draft featured a timeline which stated that, should a buyer emerge, the exchange would be shut down for one month for rebranding from Feb. 25.
Optimists argued that the Twitter clearout could be related to this rebrand, a belief that was reinforced when it emerged that Karpelès had snapped up the domain www.gox.com, the name for the rebranded entity, on Feb. 24. Everything was starting to point towards a buyout, at least for those who were determined to see it that way.
This contingent even saw his stepping down from the Bitcoin Foundation and lack of comment on events as a natural part of the succession process, which the document also said was to take place on the 25th.
The fact of the matter was, however, that Karpelès’ role with the Bitcoin Foundation had been rendered moot by this point given that he was hardly ever in contact with the other members and had never gone to a Bitcoin Foundation conference outside Tokyo. His position had become almost ceremonial, and the ceremony was well and truly over.
Karpelès, too, still retained hope, at least publicly. In an online chat with New York-based Bitcoin consultant Jon Fisher late on the 24th, Karpelès opined that he had not given up on Mt. Gox, saying, "Giving up is not a part of how I usually do things." He even posted a picture of his keyboard, with his beloved cat, Tibane, also in shot and seemingly assisting with the efforts.
Karpelès said he could not disclose whether or not he had stepped down as CEO of Mt. Gox, although at this point the question seemed like a fait accompli. He noted Selkis' blog was "more or less" legitimate, ending the argument that had sprung up since its publication that Selkis had been duped or had created it himself, and also confirmed the massive bitcoin loss.
In an attempt to keep the flame burning as long as possible, Karpelès defined the customers’ funds as "emporarily unavailable" rather than lost, although at this point the only person he was kidding was himself...
– Mark Hunter
