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S01E10: The Perils and Promises of Investing in Cryptocurrency with Teddy Wayne

Nov 20

Mt. Gox – a one-time cryptocurrency exchange – was founded in 2010. By early 2014 – a short 4 years, Mt. Gox was processing about 70% of all bitcoin transactions in the world.

And while everyone noticed how much Mt Gox had grown, something else happened between 2011 and 2014 that nobody noticed. Starting in 2011, hackers stole over 650,000 Bitcoins from Mt. Gox. They did it somewhat slowly – as slowly as one might steal 650,000 of anything over 3 years – and it was methodical.

But in early 2014, Mt. Gox noticed. And by the time they noticed, they had pretty much nothing left. So they declared bankruptcy – a process that’s still going on even now in late 2017.

Mt. Gox and the Near-Demise of Cryptocurrency

I like to start most episodes with a story, and this story is relevant to many parts of what I’ll talk to our guest today about.

It’s also a story that has become something of a meme in the world of cryptocurrency. Critics use it as an indicator that cryptocurrency is a fool’s game, but even insiders recognize the danger, and Mt Gox is often shorthand for the things that can and have gone wrong in this world.

And here’s how it happened…

Magic: The Gathering – The Beginning

In 2006, Jed McCaleb, an American programmer, decided to build a website to allow players of the game Magic: The Gathering to trade the game cards online.

Like any business, he wanted a good, related name .So he named his website Magic the Gathering, the Online Exchange.

But like any website, he also wanted a short, memorable domain, so he shortened Magic the Gathering, the Online Exchange to just five letters, and he purchased the domain mtgox.com, better known as mount gox.

And like most businesses – statistically speaking – Jed’s did not work out, not at first.

So he used the domain for other things. And in 2010, one of those things became a different type of exchange.

Mt Gox became one of the first cryptocurrency exchanges, and it took off, so much so that Jed McCaleb quickly decided to sell the exchange in 2011 to a man named Mark Karpeles. Jed – by the way – went on to do other cool things like help found Ripple.

Mark grew up in Dijon, France but was living in Japan when he bought Mt Gox in 2011. And it was a good purchase.

As I mentioned at the beginning of this story, Mt. Gox captured over 70% of BTC transactions by 2014, at the time when they discovered the theft of pretty much every BTC they held. And the collapse that ensued shook the entire cryptocurrency world for a few months.

A Long, Slow Theft – The Middle

But here’s what nobody saw coming…

Mt. Gox found just over 200,000 BTC that had not been stolen. They hadn’t been stolen because Mt Gox themselves had negligently placed them in an old digital wallet and forgotten about them.

So at the time Mt Gox filed bankruptcy, over $340 million of BTC had been stolen, creditors had claims for about $450 million, and Mt. Gox had about $110 million worth of BTC. These numbers aren’t exact, but you get the picture.

So like any good bankruptcy court, the Japanese bankruptcy court appointed a trustee and put those 200,000 BTC into trust while the case was ongoing.

But courts – even of a technologically sophisticated country like Japan – they don’t yet deal in Bitcoins. So the creditors – the people whose bitcoins had been stolen – their claims were made in dollars. You see, Bitcoins were worth about $400 a piece in early 2014. And so the court decided that it was that amount that was lost by any given depositor – a person who held bitcoins at Mt. Gox.

The court decided that they were collectively owed about $450 million at the end of the trial – a trial that is not yet over.

And Mt. Gox’s 200,000 BTC…well…they’re worth about $1.6 billion right now. So Mt. Gox’s estate has $1.6 billion worth of bitcoin, but its creditors stand to receive only $450 million. And, as you might guess, many folks are outraged about this fact, this artifact of a legal system that doesn’t yet have a rubric for dealing with cryptocurrencies.

$1 Billion – The End

So back to Mr. Karpeles, the majority owner of Mt. Gox… He’s been dealing with this for years now. In fact, he’s facing his own charges of embezzling about $1 million while running Mt. Gox. Not of stealing the 650,000 BTC, mind you, but embezzlement nonetheless.

However, he’s still the majority owner of Mt. Gox. And as the majority owner, once the $450 million is paid to creditors, he will likely inherit nearly a billion dollars, a fact that many find more outraging than even the original theft.

And by the way, authorities still aren’t positive who stole all the bitcoins – they’ve recently indicted a Russian citizen who lives in Greece.

Why Does It All Matter?

I didn’t personally lose any money in the Mt Gox theft, but I’m interested because it highlights many things about cryptocurrency for me. The still-high level of fragility, yes, but also the vastly underestimated resilience and strength of a technology that can bounce back from this type of incident. And perhaps most interestingly, the fact that our systems – social, legal, political, or otherwise – are not yet equipped to even think about many of the things that happen in the world of cryptocurrency.

So over the past couple episodes, we’ve spoken with people like Spencer Bogart and Jack Gavigan, both of whom are deep in the world of cryptocurrency – in tech, investment, and otherwise. Today, we wanted to get outside that bubble just a bit, so we decided to talk to Teddy Wayne.

Teddy Wayne

Teddy is a very successful author.

He’s published 3 novels, one of which garnered him a Whiting Award (prestigiously awarded each year to just 10 emerging writers).

He’s a regular columnist for the New York Times, has been published in GQ, The New Yorker, and many others, and is an all-around star.

And Teddy often writes about the intersection of technology and culture, which is one of the reason that he recently wrote an article on cryptocurrency – something he’s been into and interested in for a while, but not in the same ways as many of our guests so far.

On today’s episode, Teddy talks about:

1. His own experience getting to know cryptocurrency and starting to invest;
2. The experiences of people around him – both friends and folks that he’s interviewed;
3. Why people are so interested – what’s driving both the hype and paranoia;
4. What he thinks the potential perils are and how you should be careful; and
5. Why he’s so excited by cryptocurrency.

Featured Guest

Teddy Wayne

Links

Teddy on Wikipedia
Teddy’s NYT Article on Cryptocurrency
Teddy’s Books on Amazon
Mt. Gox
Jed McCaleb
Mt. Gox Trial

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About the Author

Jeremy Hendon grew up in Georgia, practiced law for a while, and then built several companies - from food manufacturing to magazines to digital events. Jeremy has also developed apps with 500,000+ downloads, co-authored multiple books, had his products featured on national TV, and has lived in 9 different countries over the last 4 years.