Mt.Gox, the Silk Road, and how Bitcoin grew to be a “thing”.

31^st October was the 17^th anniversary of Satoshi Nakamoto’s seminal white paper  “Bitcoin: A Peer-to-Peer Electronic Cash System” which started the whole cryptocurrency gold rush. It’s worth reflecting that this whole $3 or 4 TRILLION business is a mere teenager. Bitcoin.org was registered on August 18^th 2008. The first block was mined January 3^rd 2009. The source code was released 9^th. January 2009. It’s worth reflecting, too, on the fact that a chap called Hal Finney had a lot to do with the development of the code with the result that it is estimated that Satoshi is/was only responsible for some 15% of it in the end. Whether that is one person or a group we may never know.

So great – Bitcoin existed. But it faced a problem. What was it going to be used for? It’s only of value if someone will take it in exchange for something, and if both sides accept a defined value. This is where Bitcoin got really lucky.

Ross Ulbricht, a distinctly dodgy geezer, was dealing drugs and practically speaking in anything else illegal like guns and armaments online through the TOR protocol which it was thought was uncrackable. He still had the problem of how to get paid, when all of a sudden he came across Bitcoin, and the assumption that it was untraceable. Wrong as it happens, but at the time it was thought to be so. His Silk Road hypermarket started accepting Bitcoin and both Ross and his customers rejoiced. The Silk Road suddenly became an enormous business, fueled by Bitcoin. This is where the perennial complaints about Bitcoin only being used by drug and arms dealers comes from which, back in the day, had a certain veracity.

So the next problem, if you wanted to buy from Ulbricht, was how to get Bitcoin. Mt.Gox.org started as a site to exchange cards for a particular game called Magic The gathering Online. MTGO Exchange hence Mt.Gox. Initially founded by one Jed McCaleb, he shut it down at one point but had been in touch with a man called Mark Karpeles. Karpeles was a French internet and web nerd with a bit of history who had moved to Japan. He was neither a businessman nor a particularly savvy person and McCaleb took advantage (in my view) and sold Mt.Gox to him. It was a very strange contract, with lots of strings attached and probably already missing BTC on the exchange. But Karpeles jumped right in and as the Silk Road expanded, Mt.Gox had to expand to feed the monster.   At one point it traded  more than 70% of all Bitcoin.

Things went along and we had the first documented BTC purchase, the famous  2  pizzas for 10,000 BTC in May 2010. Roughly that equated to a BTC price of 0.3 pence. By that time there had been around 2.5million BTC mined. It was facilitated down the line by at least 2 US Government agents who quite conceivable stole some 850,000 Bitcoin. In particular, one Carl Mark Force IV admitted everything and was sentenced to 78 months inside. As you can see he has been out for some years now….

Mt. Gox collapsed in 2014. Karpeles had instituted almost zero business procedures. They never even did a reconciliation of what they should have and who it belonged to. They couldn’t give people what they had bought and it all fell apart. Interestingly, a while after the collapse, 200,000 BTC were found in a paper wallet, but at the very least 650,000 were siphoned off, with the finger pointing relentlessly at Karpeles. He was arrested by the Japanese authorities, which is just what you don’t want, because the Japanese legal system works pretty much on the basis that you are guilty (even if you manage to prove otherwise).

I won’t bore you with all the ins and outs but eventually he was found guilty only of falsifying data and given a four year suspended sentence in March of 2019. He was acquitted of the charge of theft of the BTC, which is what he wanted and which he had always maintained.

Rehabilitation and restitution of clients of Mt.Gox is ongoing with payments to creditors starting in July 2024 but will likely only amount to 21% or so of claims in physical (digital) tokens. It was due to complete by the end of October 2025, but this has now been extended for a further year. But the rise in Bitcoin means that even only 21% restitution is a huge gain for those who lost out. The price then was under $450. It’s now around $90,000.

Bitcoin is not invisible. The transactions are totally trackable and in general if you want to dispose of it you need to use an exchange, which because of KYC (Know Your Customer) and AML (Anti Money Laundering) will instantly reveal who you are.  A Russian called Alexander Vinnik had hacked into several different exchanges before, but in Mt.Gox’s case, Karpeles had never once done a reconciliation so had no idea anything had been stolen. Other Russian nationals were involved in the money laundering and theft in the shape of Alexey Bilyuchenko and Aleksandr Verner. The whole point here is a lesson in cyber security. They opened the box a bit and stole some BTC. Then closed it, left it for a while then did it again. It was the weakest link in a duck taped cardboard box – they were able to get the private keys of customers and hence drain those wallets. Think of private keys as bank pin codes, with the door left slightly open. They turned to BTC-e (a criminal exchange). But because they were under the misapprehension that it was all invisible, they were eventually caught and the Silk Road shut. That’s the reason the USA has billions of dollars worth of Bitcoin in its control.

Ulbricht was sentenced to two life sentences plus 40 years. Until one Donald Trump pardoned him in January 2025 immediately after his inauguration. It says a lot about the future of a lot of things in my view.

But in the final analysis, Bitcoin only became a real thing because it was able to be used and that came about because of the Silk Road. We will have to wait to see what the final curtain reveals.

Abstract of the Bitcoin White paper. A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they'll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.

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