The story of MtGox, the first major bitcoin site, is surely worthy of a film. The bitcoin exchange was but the newest version of a simple technology that was already rocking the entertainment industry: file-sharing. In 1999, an American computer programmer called Shawn Fanning hit on an idea made possible by the widespread adoption of the internet, and a piece of data compression code that turned analogue music into digital files known as MP3s. His idea was to devise a simple way of sharing these digital music files through a peer-to-peer network, which he named Napster. Users - and in the 1990s, those were often college students with access to “high bandwidth” internet connections - could download the Napster utility and share MP3 songs on their computer across the network, and download songs from other users.
Instead of storing all these songs on a central server, the network allowed the songs to remain on users’ computers, so Napster could claim that it never took ownership of the songs (and was therefore not in breach of copyright laws against unlawful sharing). Napster was a hit, gaining 80 million users. Many used the network to find commercially available songs for free, but for others, the network opened up the possibility of hunting down concert and recording bootlegs. Napster’s success also attracted the ire of big stars such as Metallica and Dr Dre, along with recording industry groups, who took out a lawsuit against Napster and eventually succeeded in closing it down in 2001. Napster, it turned out, had maintained a central server to direct traffic, so had some degree of control over what its users shared. But the cat was out of the bag: In Napster’s place, dozens of new file-sharing services sprung up for all kinds of material, including a next-generation offering called Grokster.
Into this market stepped Jed McCaleb. In 2000, along with a fellow entrepreneur called Sam Yagan, McCalel set up a file-sharing service called eDonkey. By 2005, it had overtaken Grokster as the leading file-sharing service for pirated movies and songs, and according to CacheLogic was using one third of the internet’s bandwidth. When the Supreme Court ruled Grokster illegal in 2005, eDonkey’s days were numbered - eventually, it too, was forced to shut down. But McCaleb’s enthusiasm for P2P networks remained undimmed, and in 2010 he found a new mission based on a trading card game. The inspiration? McCaleb heard about bitcoin.
The story of how MtGox got its name is bizarre. In 1993, an American games company called Wizards of the West Coast launched the trading card game Magic: The Gathering, an evolution of sorts of the popular Dungeons & Dragons-type role playing games. Magic: The Gathering was the first trading card game. It is played in person with physical cards, or on Magic: The Gathering Online with virtual cards. The game consistently rose in popularity and player numbers reached into the tens of millions. As the numbers expanded, the trading of cards attracted professional traders and spread onto online auction sites such as eBay.
In 2007, McCaleb set up a site for trading Magic: The Gathering Online cards, and called it Magic: The Gathering Online eXchange, operating under the domain name of www.mtgox.com. But McCaleb let the project to slide and the domain name sat largely unused until 2010, when McCaleb read about bitcoin and thought of his dormant exchange concept. He relaunched the www.mtgox.com site (calling it Mount Gox), and began taking commissions from people wanting to acquire or sell bitcoins. When the coins first started trading, the price of a single bitcoin in US dollars remained under one dollar and stayed that way into the first quarter of 2011. Even at that low price, hackers were prowling around MtGox.com looking for weaknesses. McCaleb’s site apparently suffered an attack with a hacker making off with thousands of dollars worth of coins. Aware that he was facilitating the dealing of an unregulated online currency, McCaleb decided to get out.
One year earlier, a 24-year-old French programmer and manga fan named Mark Karpelès was transferred to Tokyo by his employer Nexway, and Karpelès set up a company called Tibanne Co Ltd to provide web hosting services. One of Karpelès’s customers was unable to pay by credit card and asked to pay by bitcoin. Intrigued, Karpelès began to investigate bitcoin and came into contact with McCaleb. As Karpelès tells it, McCaleb offered the site to him for free, in exchange for splitting the profits 50-50 for the first six months and letting McCaleb retain a 12 percent stake in the business. So began Mark Karpelès’s rapid and short-lived ascent to emperor of the bitcoin world.
Bitcoin in 2011 was little-known outside of a handful of programming geeks - and criminals. In its first year of operations the exchange had little more than 1,000 customers, and by the time McCaleb sold it on to Karpelès, it’s likely that bitcoins were already being stolen by hackers. To combat the threat, Karpelès began re-writing the code for the site, and increased security after another hack in mid-2011, moving most of the coins into cold storage, away from internet access. (Cold storage means keeping the private key for signing bitcoin transactions on a piece of paper rather than on a computer drive connected to the internet.) By that stage, Karpelès appears to have stumbled his way into running the biggest bitcoin exchange in the world. User numbers on the site passed 50,000 and Karpelès started hiring staff to run it with him, keeping the key passwords and access to himself even as the site claimed to be handling 80 percent of global bitcoin trades.
Karpelès does appear to have been out of his depth, and didn’t realise the extent to which his site was compromised from the very start. But as would emerge years after the fact, MtGox had been a glorious target not just for for hackers of all sorts, but law enforcement officers and intelligence agencies of both the honest and crooked variety. US DEA agents and Secret Service agents on the trail of the illegal Silk Road marketplace in 2011 knew that the major source of bitcoin was MtGox, and Karpelès - aware that Silk Road was receiving negative publicity in the US - contacted US authorities to report suspicious account activity. Responding to the report, the secret service agent Shaun Bridges managed to get control of some of the MtGox accounts and stole nearly $1,000,000 of bitcoin while conducting the investigation. Another agent from the DEA called Carl Force stole bitcoin from MtGox, and alternatively threatened Karpelès and offered to become his business partner. And that was just law enforcement.
Another source was steadily emptying the MtGox exchange, beginning sometime in 2011. It would be at least three years before anyone figured out who this was, but eventually the signs started pointing to BTC-e, a Russian bitcoin exchange owned by a London-registered company. The mastermind behind this site, according to US prosecutors, was Alexander Vinnik, who allegedly stole around $4 billion worth of bitcoin from MtGox. The Japanese exchange supposedly did not notice the thefts because of the way coins were moved in and out of wallets, but in 2017 the BTC-e site was suddenly taken offline and the bitcoin seized, and Alexander Vinnik was arrested while on holiday in Greece.
At the time, though, all of this was unknown. To the casual observer, bitcoin looked like a hopeless mess.