The Early Days of Crypto Exchanges
The first cryptocurrency exchanges functioned in a de facto “wild west” environment, with high risk and no oversight.
Users were frequently forced to connect with unregulated and dangerous exchanges in the first few years after Bitcoin’s inception because there were few options for obtaining the cryptocurrency. Many of the initial exchanges, including Mt. Gox, were hacked, and customers’ cash and personal information were stolen.
Many crypto exchanges now have to abide by a slew of laws and regulations, depending on the jurisdiction in which they operate, and a number of leading exchanges have pioneered the development of processes for trading digital assets safely and securely.
However, there are numerous lessons to be gained from early crypto exchanges, reminding us that thorough investigation is required before entrusting crypto assets to a platform.
- How Early Users Obtained Bitcoin
- More Bitcoin Exchanges Hit the Scene
- Mt. Gox Hack Fallout
- Emerging Focus On Compliance and Security
Buying bitcoin is pretty simple these days, and cryptocurrency exchanges are focused on security and user experience, but this hasn’t always been the case. There were only a few ways to get Bitcoin (BTC) after Satoshi Nakamoto introduced it in 2009 under the pseudonym Satoshi Nakamoto, and most of them required users to take significant risks.
While the early days of cryptocurrency exchanges were marred by hacks, scams, and legal scrutiny, the events that occurred sowed the seeds for a new global financial system.
How Early Users Obtained Bitcoin
When Satoshi Nakamoto released the Bitcoin software in January 2009, there were only two methods to get bitcoin: either mining it yourself or by organizing a peer-to-peer (P2P) trade through a forum like Bitcointalk, which Nakamoto created to host Bitcoin-related talks.
Mining back then took significantly less computational power than it does now, and it could even be done on a home computer.
Bitcoin was more accessible to individuals who were interested at the time, but it still required some technical skills to get. Peer-to-peer exchanges were dangerous back then because they required trust between the persons transacting, but the stakes weren’t as great as they are now because each bitcoin was worth almost nothing.
The first bitcoin transactions were made for a cost of zero dollars, and the price of bitcoin peaked at 39 cents in 2010.
By 2010, the popularity of Bitcoin had expanded, and new ways to obtain it had emerged. Gavin Andresen, a Bitcoin core developer, built a bitcoin “faucet,” a website that gave everyone with a Bitcoin address five bitcoin for free.
The first bitcoin exchanges appeared around this period. Bitcoin Market, which offers a floating exchange rate for bitcoin, was announced on Bitcointalk in 2010 and launched the same year. Buyers could buy bitcoin by sending another user U.S. dollars via PayPal, and Bitcoin Market would keep the seller’s bitcoin in escrow until they received payment.
More Bitcoin Exchanges Hit the Scene
The most well-known exchange in 2010 was the now-famous Mt. Gox. The Mt. Gox domain, which stood for “Magic: The Gathering Online Exchange,” was purchased in 2007 by Jed McCaleb, who would later co-found both Ripple and Stellar. Magic: The Gathering is a trading card game, and the site was designed to act as a marketplace for Magic cards.
In 2010, McCaleb transformed the site into a bitcoin exchange, but it was not widely publicized until later.
Several new bitcoin exchanges popped up in 2011. VirWoX, a platform for buying and selling Linden Dollars, the virtual reality game’s currency, has started allowing exchanges between Linden Dollars and bitcoin.
Another exchange, Tradehill, allows consumers to buy bitcoin “instantly” rather than putting limit orders on their platform. Users could deposit money on Tradehill through wire transfers and a variety of payment processors.
Mt. Gox was sold by McCaleb to Mark Karpeles, a software developer, in 2011. In the same year, a hacker gained access to a Mt. Gox account containing a large number of bitcoin and sold it, causing the price of bitcoin on the exchange to plummet from $17 to $0 in minutes.
The hacker also obtained Mt. Gox user information, forcing the exchange to take its website offline for a time. Despite this, Mt. Gox resurfaced two years later in 2013, processing 70% of all worldwide bitcoin transactions. Users primarily deposited monies into Mt. Gox using two payment services: Liberty Reserve, a digital currency business, and Dwolla, a payment provider.
Liberty Reserve operated a private digital currency, a currency exchange, and an unregulated payment processing service where you could send and receive money. Before being exchanged into another asset, deposited money were transformed into Liberty Reserve Dollars or Liberty Reserve Euros. After that, you’ll be able to withdraw U.S. dollars or euros.
After its owners were charged with money laundering and operating unregistered money transferring business, Liberty Reserve was shut down in 2013, cutting off a major source of funding for Mt. Gox. When the US Department of Homeland Security began investigating Mt. Gox for breaking US money transmission regulations in 2013, Dwolla, which let users to send and receive money between bank accounts, was forced to stop transmitting payments to Mt. Gox.
Mt. Gox later registered as a money transmitter with the U.S. Financial Crimes Enforcement Network (FinCEN).
Mt. Gox Hack Fallout
Users began suffering long delays while trying to withdraw payments from Mt. Gox in 2014, and trust in the exchange began to dwindle.
Over the course of several years, it was revealed that Mt. Gox had been the victim of a huge hack. Management sought to hide the crypto exchange attack at first, halting Bitcoin withdrawals due to technical difficulties. The exchange halted trading and pulled its website offline a few days later.
A leaked document revealed that the exchange had been robbed of 744,408 bitcoins, with an additional 100,000 bitcoins missing, totaling roughly $460 million at the time.
Mt. Gox was able to retrieve 200,000 bitcoins later, but was forced to declare for bankruptcy and, as a result, liquidation.
Mt. Gox was the industry’s first victim of what would become a trend. Major exchanges such as Poloniex, Bitfinex, Bitstamp, Binance, Bithumb, and ShapeShift were all hacked in the years following Mt. Gox’s attack. The vulnerability of cryptocurrency exchanges inspired the phrase “not your keys, not your crypto,” which emphasizes that unless you safeguard your private keys yourself, your cryptocurrency is exposed to hacking and seizure.
Some exchanges have nonetheless been able to avoid hacks and security breaches.
Emerging Focus On Compliance and Security
In recent years, exchanges have collaborated more closely with authorities. Early on, exchanges put little effort into properly registering their operations and complying with Know Your Customer (KYC), Anti-Money Laundering (AML), and Counter-Terrorist Financing (CFT) legislation.
As a result, bitcoin earned a reputation as a money used for illegal acts, tarring the crypto community for years. Many major markets, including the United States, Europe, and parts of Asia, are now regulated.
Many of the biggest cryptocurrency exchanges have gone a long way since their founding, and exchanges that stress security and compliance have helped resurrect bitcoin’s reputation as the currency of the future, rather than the currency of criminal businesses.
Nonetheless, you should conduct your own research and carefully pick the organizations in which you place your crypto assets. Cryptocurrency exchanges displayed many hallmarks of being a disruptive technology on the outskirts of society in their early years.
Within the span of a few short years, as the world began to discover the immense potential of blockchain and digital assets, the industry has rapidly matured. With the development of reputable and regulated exchanges and the adoption of blockchain technology around the world, cryptocurrency is proving to be a lasting part of the global economy.