The Inside Story of Mt. Gox, Bitcoin’s $460 Million Disaster

By the fall of 2013, Mt. Gox’s business was also a mess. Federal agents had seized $5 million from the company’s U.S. bank account, because the company had not registered with the government as a money transmitter, and Mt. Gox was being sued for $75 million by a former business partner called CoinLab. U.S. customers complained of months-long delays withdrawing dollars from the exchange, and Mt. Gox had tumbled from the world’s number one bitcoin exchange to position number three.

But Karpeles was obsessed with a new project: The Bitcoin Cafe. Inspired by a French bistro, it would be a stylish hang-out located in the same building as the Mt. Gox offices, a very-new-looking building of metal and glass within walking distance of Tokyo’s largest train station. You could drop by for a beer or some wine, and — using a cash register proudly hacked by Mark Karpeles — you could buy it all with bitcoin. When WIRED tried to meet with Karpeles and Mt. Gox at their offices this past October — and a company representative turned us away, saying that legal reasons prevented Mt. Gox from talking to the press — the placard in the lobby of the building already identified the cafe. This company representative said it would open by the end of the year. It never did.

One insider says that Mt. Gox spent the equivalent of $1 million on the cafe venture, renovating Mt. Gox’s office building to Karepeles’ specifications. At a time when Gox’s business was falling apart, this insider says, the project was a major distraction. “[Karpeles] was super-proud of being able to use his hacked cash register with the code he wrote,” this insider says.

Says another insider: “Aside from the cafe, he liked to spend time fixing servers, setting up networks and installing gadgets… probably distracting himself from dealing with the real issues that the company was up against.”

Then, in February, the company’s fortunes took another turn. Mt. Gox stopped paying out customers in bitcoins, citing a flaw in the digital currency, and after days of silence from the company, protesters turned up outside its offices, asking whether it was insolvent.

Years-Long Hack

According to a leaked Mt. Gox document that hit the web last week, hackers had been skimming money from the company for years. The company now says that it’s out a total of 850,000 bitcoins, more than $460 million at Friday’s bitcoin exchange rates. When bitcoin enthusiast Jesse Powell heard this, he was reminded of June 2011.

After Mt. Gox was hacked for the first time in summer of 2011, a friend asked Powell to help out, and soon, the San Francisco entrepreneur found himself on a plane to Tokyo. After landing, he rushed to Shibuya station, where he was met by his friend, Roger Ver, one of the world’s biggest bitcoin supporters who just happened to live across the street from Mt. Gox. Without bothering to drop off Powell’s bags, the two rushed to the Mt. Gox offices to see what they could do. They worked through the week with Karpeles, other employees, and a handful of other bitcoin enthusiasts. They answered support inquires, did troubleshooting on the site, and tried to support the tiny company in any way they could. At one point, Powell rushed to the Apple store and came back with $5,000 worth of computers that could support the cause. But two days later, the site was still offline.

Ver and Powell were set to work through the weekend, but when they arrived at the company’s tiny office that Saturday, there was a surprise. Mark Karpeles had decided to take the weekend off. The two volunteers were flabbergasted. “I thought that was completely insane and demoralizing for the rest of the team,” Powell remembers. On Monday, Powell says, Karpeles did return to work, but he spent part of the day stuffing envelopes. “I was like: ‘Dude why are you doing this? You can do this anytime. The site is offline. You need to get the site online.'”

Powell last met with Karpeles in January, before news of the latest hack broke. He now runs a competitor to Mt. Gox called Kraken. They had lunch in Tokyo, and Karpeles seemed unworried about Gox’s future. He was excited about his Bitcoin Cafe. “It was probably some light for them in a very dark world of dealing with banks and customer complaints all day,” Powell says. “I’m sure that Mark has been very stressed for a long time and probably the Bitcoin Cafe was a fun project.” But now that world is even darker.