With the sudden collapse of the world’s second-largest centralized crypto exchange, some analysts are already judging 2022 as the worst year ever for the crypto world. The loss to FTX customers is estimated to be over $3 billion. That’s a record in this community.
However, this is not the first time the ecosystem has faced a crisis of this magnitude. Indeed, the amounts are staggering and never equal. But on closer inspection, FTX accounted for about 13% of global trading volumes over the past 12 months, compared to 46% by the Mt Gox platform in 2013, the year before its collapse. In other words, if Bitcoin could bounce back after the fall of the exchange that accounted for nearly half of Bitcoin trading volume, surviving FTX is a no-brainer.
So let’s dive into the short history of our favorite digital currency, and see three times when the fall of a platform could have caused the cryptocurrency’s ultimate demise.
MT. GOX, The first crash in history
For the first story, let’s go back to 2011 with Mt. Gox, the world’s first bitcoin trading platform. While at its creation in 2009, it was used to trade collectibles cards on the internet, its founder Jed McCaleb (also the founder of Ripple), completely changed its trajectory by adding the ability to buy and trade Bitcoins to its platform. The very first cryptocurrency bank was born.
at that time, 1 Bitcoin was worth less than a dollar; Bitcoin adoption was a far cry from what it is today and a large portion of the purchases of this virtual currency was used to buy illicit goods on the dark web.
However, it was on February 3, 2011, that the man who is now known as the Bitcoin baron, Mark Karpelès, bought 88% of the Mt Gox platform from jed. And, thinking he was making the deal of the century, he soon realized that he had made the wrong investment. Indeed, at the time of the sale, there were already 80,000 bitcoins missing from the platform’s reserves. At the time, it was worth “only” $62,000, but a few months later, with the explosion of the Bitcoin price, those same 80,000 Bitcoins were now worth $800,000.
A hole that big would spell the end of the platform if customers asked to withdraw all their assets from Mt Gox, a phenomenon called “bank runand common in the traditional financial world. It is therefore with this sword of Damocles and in the context of repeated hacks and pressure from the authorities that Karpeles tried to stabilize Mt Gox until 2013 when 70 to 80% of BTC exchanges in the world were made on Mt Gox. This represents between 5 and 20 million trading volumes per day.
But what had to happen, happened, and on February 7, 2014, the platform decides to freeze withdrawals for all its users without giving any reason to them. Three weeks later, Mark will admit that the 750,000 bitcoins of his users had disappeared during a hack of the platform. Mt. Gox was now 850,000 Bitcoins in deficit, representing 7% of the Bitcoins in circulation.
The price of Bitcoin dropped by 50% after this announcement. This was the trigger for the first bear market, which took Bitcoin to less than $160 in January 2015 (down from $1100 in late 2013). The “Bitcoin baron” was arrested in August 2015, then released after a stint in a Japanese prison, and subsequently sentenced in 2019 to 2 years in prison with a suspended sentence.
At present, the Japanese justice system is distributing some 140k BTC recovered after the judicial liquidation of the exchange, to former customers of Mt Gox. Even if the victims should only get back 10 to 15% of their BTC initially bought on Mt Gox, they are getting a minimum of X20 for it. That’s enough to make them smile.
Bitfinex, the inaccessible treasure
It’s August 2016, bitcoin is exchanging at $600 and less than 0.5% of the world’s population owns any of this virtual currency. Yet, a hacker is about to pull off what could have been the biggest move of his life. The Bitfinex platform, then created in December 2012, announced in a statement released earlier this month that it had just been robbed of nearly 120k Bitcoins or 30% of the platform’s funds. The hacker has filtered the system of the exchange to perform more than 2000 transactionssending Bitcoins to an external address.
The impact on the market is direct: more than 20% Loss in the price of Bitcoin in the days following the hack. Unfortunately for the hacker, not everything went as planned. The authorities quickly got hold of the case and the address was very quickly monitored and blacklisted from all exchanges, offering no escape route for the thief, who would be caught at the slightest movement. It was as if he was immobilized by a sniper’s laser, ready to shoot.
By 2021, the hacker had an estimated wealth of over $7 billion.
Between 2016 and 2022, he tried to launder this money several times by attempting quick swaps to other cryptocurrencies or via mixers, and was able to hide almost 25k BTC, but no more. The rest was still blocked at the address of the theft. By 2021, he was holding an estimated wealth of over $7 billion that he could not touch, somewhat frustratingly.
Meanwhile, Bitfinex has responded in exemplary by finding a solution to compensate its customers. The creation of a “replacement” token for the time it takes to refund the funds. The “BFX”, is distributed at the rate of 1 BFX for every $1 lost. The token was renamed “LEO” and is worth about $4. It is in the top 20 cryptocurrencies by capitalization.
Getting back to the hacker, it was in 2022 that investigators found the trail of the owner of 25,000 lost BTCwhich led them directly to the private key of the address containing the remaining 90,000 BTC. The culprits were Ilya Lichtenstein and Heather Morgan, a couple of “serial entrepreneurs” who had simply stored this private key on a drive they owned. This is rather ironic when you know that Lichtenstein, is the founder of the blockchain startup “Endpass,” a cross-platform offline password management app whose goal is to “securely store passwords” to “stop fraud and terrorism.” And that Morgan, in an article written for Forbeshad given some advice to businesses on how to stay safe online in the face of rising cybercrime.
The DAO, a difficult start for DeFI
Granted, we’re out of the framework of the centralized exchanges. But as the knowledge of The DAO hack is essential to understand what Ethereum and DeFi isI had to talk about it. The DAO is the first DAO (decentralized association).
it’s april 2016, Ethereum is 1 year oldand the ether is trading at less than $15. A group of developers decides to launch a crowdfunding campaign for their newest project, the creation of a venture capital fund accessible to anyone, and via cryptocurrency. They don’t know it yet, but this will be one of the biggest crowdfunding campaigns in the world.
Venture capital is, as the name suggests, an investment fund that specializes in risky investments, for example, startups: The risk is high, as there is a potential to lose everything if the startup goes bankrupt; but the gain can be extremely high if the investment turns out to be good.
The DAO is therefore a decentralized platform created on the Ethereum network whose goal is to make a financial product usually very restricted access to anyone. It was extremely innovative for its time, and it is still a very current topic in 2022.
However, the project — a little too far ahead of its time — only lasted a few months because of a flaw that was quickly detected by hackers. The hackers had found a way to recover more than 100 Ethers per second in the DAO’s smart contract. A smart contract that took place more than once 10 million of ethersthat is to say, 14% of the available tokens at that time.
On June 17, 2016, more than 3.5 Million Ethers were siphoned off, which amounted to about $50 Million.
According to many analysts, this event could have caused the end of what is now the second-largest blockchain in the world. To fix the situation, a proposal was tabled to cancel these transactions and simply roll back the blockchain. It was accepted by the majority.
Only a small part of the community contested this decision, judging it contrary to the values of the blockchain. Indeed, the latter is supposed to be immutable, that is to say, one should not be able to go back. From there, a split was created between the two opposing visions, and the blockchain was split in two: the Ethereum blockchain that we know today with its token, the ETH, and the original blockchain that is now called Ethereum Classic, with its token the ETC. This is what we call a fork of the blockchain.