In the first part of Crypto Stories, we talked about The Inception of Bitcoin, the second part describes The Early Days of Bitcoin History 2009-2012. Today, we’re taking another journey into Bitcoin’s early days, a time when its price didn’t boast five zeros in its price. We’re embarking on a journey through Bitcoin’s first major market movements — when it started breaking price ceilings, attracting regulators' attention (and the wrath), and surviving some tough times. How did a currency now recognized globally almost vanish into oblivion? And who bore responsibility for the mistrust Bitcoin faced?
The Rise of Bitcoin Exchanges
Mt. Gox was founded in 2007 by Jed McCaleb. At first, it dealt with trading cards for Magic: The Gathering, which inspired its name — Magic: The Gathering Online eXchange.
If Bitcoin was the Cinderella of the crypto industry, Mt. Gox was its fairy godmother, but with slightly dubious powers. By adding Bitcoin to its trading list, the exchange quickly became the largest crypto platform, handling up to 70% of all Bitcoin transactions.
On February 9, 2011, Bitcoin reached $1 for the first time. Just a few months later, in June, its price soared to $10, then to $30 on Mt. Gox. This represented a 100x increase from the start of the year when Bitcoin hovered around $0.30.
Impact on Bitcoin’s liquidity and price
Mt. Gox’s key achievement was Bitcoin market liquidity. Before its emergence, buying Bitcoin was harder than explaining blockchain to your grandmother. With the exchange’s arrival, trading became more convenient, boosting Bitcoin’s price from a few dollars to $150 by early 2013.
However, success brought its own risks. Frequent hacking attempts, management mishaps, and a lack of transparency sounded the first alarms. But the full-blown disaster was still ahead — coming in 2014, and we’ll get to that soon.
Regulatory Attention and Legal Cases
In 2011, Silk Road emerged on the web — a dark spot on Bitcoin's reputation, or an online marketplace for everything illegal: from drugs to fake documents.
The marketplace sold more than 10,000 products, with 70% of them being banned psychoactive substances (340 types) illegal in most or all countries. It’s important to note that the founder, Ross Ulbricht, did have some conscience: his rules forbade the sale of child pornography, credit card data, murder-for-hire services, and weapons of mass destruction.
Ulbricht believed Bitcoin, with its anonymity, was perfect for his venture. The idea was simple: buyers sent Bitcoins, sellers shipped their "goods," and Ulbricht took a commission.
By 2012-2013, annual sales on Silk Road were estimated at $14-$15 million. By 2013, Silk Road had grown into a major business, attracting attention not only from shadowy crypto enthusiasts but also the FBI.
On October 2, 2013, Ross Ulbricht was arrested in San Francisco. He was charged with drug trafficking, hacking, and conspiracy to launder money. The FBI shut down the platform and seized $28 million worth of Bitcoin (at the time). This was the first major blow to Bitcoin’s reputation, with the media sensationalizing the narrative that cryptocurrency was a tool for criminals.
The agents were able to arrest Ulbricht after the Canadian government discovered a package containing nine fake documents, which Ulbricht planned to use to rent servers for Silk Road. Naturally, Bitcoin’s price took a hit, dropping sharply from $124 to $82 (66%) within a few hours.
On May 29, 2015, Ulbricht was sentenced to life in prison without the possibility of parole.
Spoiler alert: Fast forward to today, and let’s remember the crypto-positive Trump. Among his campaign promises was the pardon of Ross Ulbricht. Trump believed Ulbricht’s sentence was too harsh and vowed to pardon the Silk Road creator. Let’s see if he keeps his word when re-enters the Oval Office.
The Shutdown of Mt. Gox (2014)
2014 was a tough year for Bitcoin — its most popular exchange, Mt. Gox, faced a series of hacker attacks, poor management, and software vulnerabilities. Mt. Gox's CEO, Mark Karpeles, came under investigation, and most customers never got their funds back.
On June 19, 2011, Mt. Gox experienced a security breach that caused the nominal value of Bitcoin to drop to 1 cent. It was reported that the hacker used the compromised credentials from the Mt. Gox auditor's computer to illegally transfer a large number of Bitcoins to themselves. The hacker sold these at an undervalued price using Mt. Gox's software, and the price was adjusted to match legitimate market transactions shortly afterward. The accounts affected had losses exceeding $8.75 million.
Here is the timeline we were able to track:
Customer complaints about long withdrawal delays began to rise in February 2014. On February 7, 2014, Mt. Gox halted all Bitcoin withdrawals. The company announced that it was suspending withdrawal requests "to gain a clearer technical understanding of currency processes."
On February 10, 2014, the company issued a press release claiming that the problem was due to Bitcoin's transaction malleability:
"A bug in Bitcoin's software allows someone to manipulate transaction details, making it appear that a Bitcoin transfer to a wallet has not occurred, when in fact it has. Because the transaction seems incorrect, Bitcoins can be re-sent. Mt. Gox is working with Bitcoin core developers and others to mitigate this issue."
On February 17, 2014, with Mt. Gox still not allowing withdrawals while competitors resumed normal operations, the company released another press release outlining steps they were taking to address security concerns.
On February 20, 2014, Mt. Gox released another statement without specifying a date for resuming withdrawals. Citing "security issues," Mt. Gox moved its offices to another location in Shibuya. The Bitcoin prices quoted on Mt. Gox dropped to less than 20% of the prices on other exchanges, reflecting the market's assessment that Mt. Gox was unlikely to pay back its customers.
On February 25, 2014, Mt. Gox announced on its website that "all transactions have been suspended for now," citing "recent news reports and potential consequences for Mt. Gox's operations."
Legal proceedings and the aftermath of the Mt. Gox collapse
On February 28, 2014, Mt. Gox filed for creditor protection in Tokyo under a legal process called minji saisei (or civil rehabilitation), which allowed courts to seek a buyer for the company. Mt. Gox reported having liabilities of about 6.5 billion yen ($65 million at the time) and assets of 3.84 billion yen.
The company claimed to have lost nearly 750,000 Bitcoins belonging to its customers, as well as 100,000 of its own Bitcoins, which amounted to about 7% of all Bitcoins in circulation at that time and were worth around $473 million at the time of the filing. Mt. Gox issued a statement saying: "The company believes there is a high likelihood that the Bitcoins were stolen," blamed hackers, and began searching for the missing Bitcoins. CEO Karpeles stated that technical problems had enabled fraudulent withdrawals.
On March 9, 2014, Mt. Gox filed for bankruptcy in the U.S. to temporarily halt lawsuits from U.S.-based traders who claimed that the Bitcoin exchange operation was a scam.
Karpeles was arrested by Japanese police in August 2015 and charged with fraud, embezzlement, and manipulating Mt. Gox's computer system to inflate account balances — charges not related to the missing 650,000 Bitcoins.
The Impact of Mt. Gox on Bitcoin was catastrophic: between February 1, 2014, and the end of March, its price dropped by 36%.
The Bitcoin 2013 Price Bubble
2013 witnessed Bitcoin's first major price surge since its inception. Starting the year at $13.00, Bitcoin surged to nearly $250 by April. It then cooled off for a while before rising sharply again to over $1,100 in December of that year.
This marked Bitcoin's first major bull market, with many buyers driven more by a fear of missing out (FOMO) than by strategic analysis. Despite the high prices, it took more than three years for Bitcoin's value to reach $1000 again. The price had dropped as much as 85% at its lowest, remaining relatively stable for several years.
The record-breaking growth helped push Bitcoin's market capitalization past $1 billion for the first time.
Factors leading to the bubble and the subsequent crash
However, as is often the case with rapid growth, a sharp decline followed. The crash was triggered by a series of events, including the collapse of Mt. Gox, news surrounding Silk Road, and an overall market overheating.
In February 2013, Coinbase reported the sale of over $1 million in Bitcoin, with the average price per coin at $22.
In addition, installing the world’s first Bitcoin ATM in Vancouver allowed people to exchange cash for cryptocurrency, further increasing exposure to Bitcoin.
Bitcoin gained more media attention when the People's Bank of China banned Chinese financial institutions from handling Bitcoin transactions in December 2013. This led to the closure of BTC China, then the largest Bitcoin exchange, and triggered a sharp drop in Bitcoin’s price.
These events contributed to the market Bitcoin price volatility, ultimately culminating in the crash that followed it's 2013 bull run.
Volatility and Bitcoin Market Crashes
The early years of Bitcoin (2013–2014) demonstrated to the world that cryptocurrencies could be extremely volatile. Price fluctuations created excitement and fear among investors. The sharpest price spikes often occur due to news events, Bitcoin market manipulation, and external occurrences.
In November 2013, Bitcoin's price surged to its first historic peak — over $1,200. This was fueled by several factors: media attention, speculative activity, and the growing popularity of cryptocurrencies as an asset class. However, this was followed by a steep decline: within a few months, the price fell below $800, and eventually to under $200 by the beginning of 2015. The panic caused by Mt. Gox's collapse and the shutdown of Silk Road made matters worse.
Market Manipulation and Security Breaches
In the early days when the market was young and poorly regulated, major players could easily manipulate prices. One notable example was the manipulation on Mt. Gox, where trading volumes were artificially inflated. This created the illusion of significant demand for Bitcoin, driving the price upwards. But when the manipulations were revealed, trust in the market diminished, leading to further price drops.
Security breaches also played a significant role. In 2014, Mt. Gox lost 850,000 Bitcoins, which was the largest theft in cryptocurrency history at the time. Such incidents became painful reminders of the need for reliable infrastructure and asset protection in the growing crypto market.
The Growth of LocalBitcoins
LocalBitcoins, founded in 2012 by Finnish entrepreneur Nikolaus Kangas, revolutionized the way Bitcoin transactions were conducted by offering a decentralized peer-to-peer (P2P) platform that allowed users to buy and sell Bitcoin directly with each other, bypassing centralized exchanges.
At a time when exchanges like Mt. Gox had lost trust due to security issues, LocalBitcoins emerged as a reliable alternative, providing a simple and effective way to transact Bitcoin for fiat money.
This peer-to-peer Bitcoin trading approach made it more accessible, especially in regions with limited access to traditional exchanges. Users could find deals in their local area and pay via bank transfers or even cash, significantly broadening Bitcoin's reach.
LocalBitcoins global impact
In countries like Venezuela, Nigeria, and Zimbabwe, where hyperinflation and economic instability were prevalent, LocalBitcoins became a crucial tool for citizens looking for alternative means to store value. In Venezuela, for example, LocalBitcoins saw a surge in Bitcoin trading volumes during the country's economic crisis, as people turned to Bitcoin to protect their savings from currency devaluation.
Despite its success, LocalBitcoins faced challenges, such as fraud and money laundering, which prompted the platform to implement stricter identity verification and anti-money laundering measures. However, its contribution to Bitcoin's growth and global reach remains significant, serving as a model of how technology can adapt to shifting market conditions and user needs.
Today, LocalBitcoins stands as an example of the power of decentralized platforms in empowering individuals worldwide.
HODL Team
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