The “Wild West” of Crypto Exchanges
Buying bitcoin is pretty simple these days, and crypto exchanges are focused on security and user experience, but this wasn't always the case. There were only a few ways to purchase Bitcoin (BTC) after the pseudonymous Satoshi Nakamoto created it in 2009, and the majority of them required users to take substantial risks. While the early days of cryptocurrency exchanges were marred by hacks, frauds, and legal scrutiny, the events that unfolded sowed the seeds for a new global financial system.
How Did Bitcoin Get Its Early Users?
When Satoshi Nakamoto published 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) exchange 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 confidence between the persons transacting, but the stakes weren't as great as they are now because each bitcoin was worth almost nothing.
The initial 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 get it had appeared. 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 debuted 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 Have Arrived
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 sprung up in 2011. VirWoX, a cryptocurrency exchange that allows users to buy and sell Linden Dollars, the virtual currency used in the popular virtual reality game Second Life, has started allowing trades between Linden Dollars and bitcoin.
Another exchange, Tradehill, allows customers 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 used two payment services to deposit money into Mt. Gox: Liberty Reserve, a digital currency service, and Dwolla, a payment service.
Liberty Reserve had its own 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 converted to Liberty Reserve Dollars or Liberty Reserve Euros. You'll be able to withdraw dollars or euros at that point. After its owners were charged with money laundering and operating an unregistered money transferring company, Liberty Reserve was shut down in 2013, thereby cutting off a major source of income 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 with the US Financial Crimes Enforcement Network as a money transmitter (FinCEN).
Fallout from the Mt. Gox Hack
Users began suffering significant 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 discovered 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 pattern. Major exchanges including as Poloniex, Bitfinex, Bitstamp, Binance, Bithumb, and ShapeShift were all hacked in the years after 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 personally, your cryptocurrency is exposed to hacking and confiscation.
Despite this, several exchanges have managed to escape hackers and security breaches.
Compliance and security are becoming increasingly important.
In recent years, exchanges have collaborated more closely with authorities. Early on, exchanges put minimal 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 portions 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. The business has evolved quickly in only a few years since the world began to realize the great potential of blockchain and digital assets.
Cryptocurrency is proven to be a long-term element of the global economy, thanks to the creation of credible and regulated exchanges and the widespread usage of blockchain technology.