In the crypto industry, there exists a whole idea of a market reset. It happened by way of the bankruptcy of the Mt.Gox bitcoin exchange, The DAO hacking, the ICO bubble burst, as well as the collapse of the crypto market in March 2020. Each of these resets were accompanied by severe drawdowns in the entire crypto market, but ended up in the implementation of groundbreaking solutions and new price ceilings for numerous crypto-assets.
Bankruptcy of Mt. Gox
Mt.Gox is a bitcoin exchange first launched in 2010. In 2011 through 2014, the exchange grew by leaps and bounds as the Bitcoin price rose, making it the largest trading floor in the world. In late 2013, it accounted for 50% to 70% of all BTC transactions, judging by some estimates.
Meanwhile, Mt.Gox faced scandals throughout the period. Its business partners accused them of violating agreements, while the U.S. authorities fined them for operating in the country without a permit, in addition to customers constantly complaining about delays in withdrawals, which could last up to several weeks or even months. As a result, the exchange in question lost its leading position on the market, still considered a reliable trading platform.
Everything lasted until Feb. 7, 2014, when Mt.Gox stopped withdrawing bitcoins. On Feb. 24, the exchange declared its shutdown due to the loss of 850,000 BTC, withdrawn by cybercriminals from the exchange’s hot wallet over the course of several years.
Since 2014, former customers of Mt. Gox customers have been struggling to claim their money back. The recovered 200,000 BTC were transferred to the bankruptcy trustee. Between 2017 and 2018, they traded a part of the coins worth more than $405 million. For years and years, the partners strove to agree on a recovery plan and a compensation payment procedure. The ultimate plan was approved at the end of 2021 – payouts are scheduled to begin this year and will be carried out gradually so as not to collapse the cryptocurrency market.
The loss of bitcoins exposed the level of incompetence, negligence and irresponsibility, along with many cases of disregard for security measures – you have to be a pretty lousy manager to overlook the theft from your own wallet for several years. It was hard for lots of victims to believe such carelessness, which led them to accuse Karpeles of fraud. Back in August 2015, Mark Karpeles was arrested, then spent a year in jail, but was subsequently released on bail. He was convicted of forgery of stock documents and sentenced to 2.5 years’ probation in March 2019.
The Mt. Gox case was a landmark in the evolution of the crypto market. This event caused bitcoin to crash, but did not lead to its collapse. The identified security and management miscalculations raised the security standards of other crypto-exchanges.
How the hack of Mt. Gox has revolutionized the crypto market:
- The coins of users and exchanges became stored separately (though not all sites still do this);
- Compensation funds have been established, allowing users to be refunded in the event of hacking;
- Cryptoinvestors figured out the “not your keys — not your bitcoin” principle and began to think about the advantages of non-custodial solutions that do not store users’ private keys, for example, the control over the assets remains with the investor. Hence, the non-custodial wallet market began to develop;
- An infrastructure analytics and external control over crypto exchanges, such as Chainalysis platform, has emerged;
- Exchanges became aware of the significance when it comes to interacting with regulators.
The DAO Attack
The DAO is a decentralized venture capital fund powered by Ethereum. It used to raise funds to invest in startups through smart contracts. Moreover, it operated as a decentralized autonomous organization. That is, an organization without a nerve center or leader, run by the community through the voting of token holders.
The project was launched in 2016, and even then third-party programmers emerged who started warning the community that smart contracts had some vulnerabilities. In the summer that same year, The DAO development team encouraged participants to vote on the implementation of updates to fix the bugs discovered. However, a few days later, an unknown intruder got ahead of the developers and exploited a vulnerability in the system, thereby withdrawing more than $53 million in assets from the protocol.
The DAO and Ethereum suffered a major setback, the latter at the time had only been been a thing for a year. In addition, 14% of all ETH in circulation was invested in The DAO. Therefore, the communities of both projects began to look for a way out.
Vitalik Buterin suggested that the Ethereum network should be hardforked and rolled back as before the hack. A lot of people supported this proposal. As a result of the hardfork, two versions of the blockchain appeared. The version that emerged became the main ETH network. Still, there were also those who did not want to support Buterin’s idea. They continued to praise the old version of the chain in which that very attack occurred – this network began to be called Ethereum Classic. The DAO was shut down in September 2016.
- Projects have become more attentive to auditing the code, identifying and eliminating its vulnerabilities;
- Developers of crypto projects have got better at following securities laws and interacting with regulators
ICO bubble burst
ICO is a way to raise funding for investors in crypto projects, by selling tokens or coins. This is similar to crowdfunding, which is the collective investment to launch a project.
Usually ICOs were held in the following way:
- A company that wishes to attract investment releases tokens or coins and then sells them on the open market at a given price, provided that at different stages of the ICO this price may vary.
- After tokensale is finished, the tokens or coins of the projects are placed on crypto exchanges where they are traded based on supply and demand. If the project is considered to be in demand, its assets go up in value, if not, they drop.
The first ICOs took place in 2013, but became massively popular in 2016-2018 – about 3,000 tokensales of large and small scale were organized over the two years. In total, according to various estimates, they attracted from $22 billion to $70 billion.
Back then, almost no one thought about the fact that ICOs could violate securities laws. But later most regulators around the world began to consider the ICO as an analogue of an IPO. The SEC alone has sued many issuers of major ICOs, including Ripple and Telegram.
In practice, it turned out that up to 80% of ICOs were fraud or were conducted by unscrupulous developers who did not even have a work product. In early 2018, when the so-called crypto winter came, the ICO bubble began to pop. By the end of 2019, about 87% of all ICO tokens brought investors nothing but losses, and many projects have closed.
Despite all its shortcomings, the ICO played a huge role in the popularization of cryptocurrencies:
- The excitement around ICOs was one of the drivers of the crypto sector in 2017-2018 and helped bring information about cryptocurrencies to the masses;
- After the ICO bubble burst, investors have become more selective in their choice of projects for funding;
The cryptocommunity has developed new forms of fund-raising.
Each collapse of the crypto market makes it stronger in the long run. Everyone involved in this industry learns from their mistakes, recovers from losses, takes remedial action and keeps growing.
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