What Can We Learn from the Biggest Crypto Crashes?

In the face of this recent downturn in the market, it’s useful to look at past crypto market crashes to see if there’s anything to be learned from those experiences. Indeed, the 50% drop in the bitcoin price over the past couple of months is nowhere near the worst drop ever experienced by bitcoin, as the crypto asset has declined by more than 70% on multiple occasions. However, every time bitcoin is declared dead, it has always eventually come back to hit new all-time highs once again.

Let’s take a close look at four of the biggest bitcoin and crypto market crashes in history to see what we can learn.

Mt. Gox Gets Hacked

The first major crash in bitcoin’s history was also its worst. In June of 2011, Mt. Gox was by far the largest bitcoin exchange in the world, as the Bitcoin network itself had only launched two years earlier. The exchange was basically the only game in town, and it had been hacked, which would be a sign of things to come over the next few years.

The way the hack worked is that someone with access to a Mt. Gox auditor’s account credentials effectively created money out of thin air by increasing the bitcoin balance of his personal account. He then sold all of the fake bitcoin he created out of thin air to legitimate traders on the Mt. Gox platform, which crashed the price to nearly zero. After that, the hacker bought up as much of the artificially-cheap bitcoin as possible and withdrew it to his own personal wallet, as did other traders who just happen to be on the exchange at the time of the incident. It is estimated that roughly 2,500 bitcoin were stolen as a result of this event.

One bitcoin trader posted a video of the bitcoin price crash associated with this Mt. Gox hack on YouTube:

Obviously, this had an extremely large impact on the short-term credibility of bitcoin itself and not just Mt. Gox, as the bitcoin exchange was such a massive part of the ecosystem. The bitcoin price had hit an all-time high of $29, but it was down to $2 by November, which is a decline of roughly 93%.

In the grand scheme of things, this event turned out to be nothing more than a hiccup for bitcoin, but many thought it would lead to the death of the cryptocurrency. There were a large number of lessons learned through this incident.

For one, the centralized exchanges built on top of the Bitcoin network should not be conflated with the underlying blockchain itself. Just because an exchange was hacked does not mean that there is a fundamental problem with bitcoin itself. Another lesson was that it has never been wise to claim that bitcoin is dead. The bitcoin obituaries page is filled with hundreds of instances of these claims by notable people and media outlets over the years, and they’ve all turned out to be untrue. Thirdly, this incident highlighted the risks of turning over ownership of private keys to a trusted third party. As the saying goes, “Not your keys, not your coins.”

As a side note, this incident also led to the Bitcoin community creating a new meme, known as getting “Goxx’ed”.

Due to the growth in bitcoin as a credible asset and the development of much more trustworthy crypto institutions over the ensuing decade after this hack, it’s unlikely that we’ll ever see such a massive decline in the bitcoin price ever again.

Goxx’ed Again

In April 2013, bitcoin traders would get Goxxed again. This was a time when the crypto asset really started to enter the mainstream financial press psyche for the first time, and bitcoin coverage on networks like Bloomberg and CNBC became a somewhat regular occurrence. Due to the increased bitcoin coverage and an increasing bitcoin price, the market got extremely overheated. Around this time, Mt. Gox was still king of the bitcoin exchanges, and it accounted for roughly 70% of the market, despite the fact that the many issues that the platform had faced up to this point led to many experts recommending traders move to other exchanges.

During this month, there were multiple instances where the Mt. Gox trading engine simply could not keep up with the demand. The Mt. Gox site would often lag or not load at all, and traders would see the price crashing as they were slamming the sell button to no avail. Due to the extreme lag time on trades and the inability for Mt. Gox to handle the growing demands of those who wanted to trade bitcoin, the platform was shut down for a number of days to let the market cool off.

After hitting an all-time high of around $259 on April 10, the market would fall to $68 in a matter of days due to all of the issue with Mt. Gox. This was a sharp drop of nearly 75% in an extremely short period of time, but bitcoin would recover to reach new all-time highs later in the year.

This was another learning experience for bitcoin traders, as many now understood that Mt. Gox could not be relied upon at all. Many traders began moving their funds to other exchanges, but Mt. Gox’s dominance in the bitcoin exchange market also continued for awhile longer. This was not the end of Mt. Gox, but the writing was on the wall. Other exchanges, such as Bitfinex and Bitstamp, began to gain more notoriety in the months that followed. Put simply, it was time for bitcoin to grow up and for adults to get involved, and many of the largest crypto companies in the pace today have their roots in this time period.

The Third and Final Mt. Goxxing

As mentioned above, the bitcoin price did not hit its yearly high in April 2013. That would come near the end of the year, and this time the pin to pop the short-term bubble was China. Regulatory statements about bitcoin from the Chinese government have become their own meme in bitcoin over the years, and their origins can be found in late 2013 when these comments first began and there was a large amount of uncertainty around whether they were even legitimate.

Bitcoin first made new all-time highs of over $1,000 in November around the time Silk Road was shut down and hearings about bitcoin took place in the U.S. Congress. The price would eventually peak around $1,150 on December 4th before crashing down to $385 just a couple of weeks later. There were a number of rumors and reports around a potential ban on bitcoin by China that sent the price moving up and down throughout the winter.

To make matters worse, Mt. Gox finally died for good in early 2014. The company filed for bankruptcy, and it was revealed that the exchange did not have the bitcoin they said they did. They were effectively operating on a fractional reserve basis, and many wondered, once again, if this would be too much for bitcoin itself to handle. Thankfully, a number of Mt. Gox alternatives had sprouted up over the previous year or so, including Coinbase, which is now a well-known, publicly-traded company. The low for this bitcoin bear market would not be hit until January 2015 at a price of $177. This was a roughly 85% drop, but at least Mt. Gox was no longer a part of the bitcoin industry.

This crash reiterated many of the lessons of the first major crash in June 2011, which were that you shouldn’t simply hand over your bitcoin to a shoddily-run exchange like Mt. Gox. Many bitcoin users from this time period will still not use the regulated, well-respected exchanges that exist today because of the experience of losing their coins on Mt. Gox. However, it should be noted that those who lost money on Mt. Gox are expected to get at least some of their money back at some point once everything is settled in court.

The year 2013 also marked the point that various governments, most notably the United States and China, began to pay more attention to bitcoin, but the fact that bitcoin eventually went on to hit new all-time highs after widespread fears of an imminent ban on the technology showed that governments may not be so quick to stamp out cryptocurrency. As time goes on and the crypto market grows, it also becomes more difficult for governments to ban bitcoin even if they wanted to do so.

The ICO Bubble Pops

The final crash we’ll cover is the first one that wasn’t all about bitcoin. Ethereum launched during the aforementioned bear market after there was uncertainty as to whether China would ban bitcoin and Mt. Gox said its final goodbyes. The idea was that Ethereum would act as a “world computer” for a variety of decentralized applications (dapps) to be built, and the main application people wanted to build in the crypto bull market from 2015 through 2017 was the ability to raise funds via initial coin offerings (ICOs). Ethereum itself raised tens of millions of dollars worth of bitcoin in its own ICO before the platform was launched.

All of the ICOs that were taking place in 2016 and 2017 led to a large amount of hype around the idea of cryptocurrencies and various crypto assets as a whole, and these token sales were taking large amounts of bitcoin and ether off the market and into the treasuries of various dapps. While some of the decentralized finance (DeFi) applications that have become popular today have their roots in the 2017 ICO bubble, the reality is that there were not many ICOs that were actually able to deliver much utility at all, and many of the tokens associated with these offerings eventually fell to basically zero.

The bitcoin price eventually peaked at nearly $20,000 in December 2017, but it crashed back below $10,000 around the beginning of February 2018. This was a drop of around 80%. For ether, the crash was felt even harder, and the crypto asset has not yet been able to reach the levels it did in 2017 in bitcoin-denominated terms. Eventually, the bitcoin price would bottom out at around $3,600 in November 2018, before the next bull market would begin.

The 2017 ICO bubble was the first bubble where it was about a larger crypto market than bitcoin itself, but it’s still unclear how much value these alternative crypto assets will be able to provide. A key lesson from the massive ICO bubble is that blockchains and cryptocurrencies aren’t going to solve all of the world’s problems.

It’s extremely important for those speculating in the crypto market to understand the fundamental value proposition of the assets they own, as the bottom can drop out of useless tokens rather quickly. That said, the rise of dog-focused meme tokens and Ponzi-esque yield-farming tactics over the past year indicate the crypto market may be met with another harsh lesson in the not-too-distant future.