Issue 35 Of CoinMetrics’ State Of The Network Re-Examines Largest Bitcoin Hacks In Its History

  • The 35th publication of CoinMetrics’ State Of The Network discusses the most massive hacks in the history of Bitcoin.
  • Bitcoinica was a trading platform that launched in 2011 and gained a large amount of support from the community during the early times.
  • Mt. Gox had no more Bitcoin left to be stolen apart from that they held in cold storage.

The 35th publication of CoinMetrics’ State Of The Network discusses the most massive hacks in the history of Bitcoin and the consequences they had on the world’s most popular cryptocurrency.

Some of the most significant disturbances in the Bitcoin ecosystem brought by the cyber-crimes discussed in this article, namely the Bitcoinica, Mt. Gox, Bitfinex, and Binance hack. These have had the largest fallouts within the Bitcoin community.

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The Bitcoinica incident is the first one discussed in the article, and CoinMetrics’ sees it as the most influential violation of the Bitcoin market of all time. Bitcoinica was a trading platform that launched in 2011 and gained a large amount of support from the community during the early times.

But during 2012, the exchange ended up suffering several cascading compromises in its system that lead to a large amount of Bitcoin worth a near estimate of up to $650 million stolen.

The first failure that began the domino effect across a span fo just five months was the failure of the web host that Bitcoinica used: Linode. Bitcoinica’s server targeted by an attacker who used a compromised Linode web portal and their wallet emptied draining 43,554 BTC ($213,886).

Then a few weeks later, the exchange’s hot wallet was exploited, ending up with another 18,547 BTC ($92,061) stolen. Then, soon, Bitcoinica’s source code was also leaked, and their old Mt. Gox API key unveiled.

Bitcoinica held some of their BTC on Mt. Gox, and their API key theft resulted in another 40,000 BTC ($305,236) stolen along with another $40,000 in cash. Luckily enough, Bitcoin prices continued rallying mostly ignorant to the hacks. Roger Ver, an early investor in Bitcoin, had about 24k BTC holdings in Bitcoinica and lost the most during the hacks.

Bitcoinica’s source code leaks also brought forth many new exchanges that function successfully to this day that built using Bitcoinica’s bases. The sudden death of a successful transaction also opened up space to plenty more competitors in the area.

The second major incident discussed in the report is the Mt. Gox hack. It was one of the most popular exchanges as Bitcoin began gaining traction in a global market and had a large trade volume for Bitcoin from 2010 to 2013.

Unlike most other transactions, Mt.Gox didn’t go through a single devastating hack that ruined its industry presence. Throughout its life span, Mt. Gox suffered several hacks that eventually led to its demise in 2014.

The first hack saw 79,956 BTC ($70,000) taken out of Mt. Gox’s wallet in 2011. Later during the same year, their hot wallet was hacked and gradually drained by the hacker without being noticed by the exchange.

By 2013, Mt. Gox had no more Bitcoin left to be stolen apart from that they held in cold storage. The exciting part is that the public became utterly aware of all the cascading hacks Mt. Gox had gone through, only in 2014, when the exchange stopped withdrawals. The prices of Bitcoin acted very volatile to these events and crashed by hundreds of dollars following awareness of what had happened.

The Mt. Gox hack crippled the price of Bitcoin severely during the period, and the cryptocurrency took more than three years to reach another high after the hack. But the entire incident and the number of failures that Mt. Gox endured brought full media attention and therefore introduced a large number of the population to Bitcoin.

The entire hack also affected the public outlook on Bitcoin severely as most people lost faith in what the cryptocurrency could be due to such vulnerabilities in the entities that were supposed to manage them.

The third major hack discussed in the CoinMetrics’ report is the Bitfinex exploit. Bitfinex is one of the exchanges that was built ground up using the leaked Bitcoinica source code and remains a viral and strong moving exchange to this date despite the hack.

In 2016, 119,756 Bitcoin stolen due to an API key compromised. The amount of BTC stolen was first unclear until on-chain analysis made to get more definite results. Bitcoin prices dropped by $200 right after the hack, but it got back up to pace in the coming months even though Bitfinex lost about 36% of its cash reserve.

The exchange did recover from the incident by cutting 36% of all balances from user accounts and offering them a BFX token for every dollar stolen or the option to convert their lost holdings into shares in their parent company iFinex Inc.

The final hack to be featured on the issue was the Binance hack last year in 2019 when 7,500 BTC withdrawn from their hot wallet. The hackers exploited various retail accounts to break through the withdrawal limit and fool Binance’s hot wallet processing system.

Although it posed a considerable loss for the exchange, they were well prepared to face such a situation with a Safe Asset Fund that they stored separately in cold storage from 10% of all their trading fees.

This allowed them to avoid insolvency during the epilogue of the theft. The hack also turned out to have little to no impact on the trading price of Bitcoin at the time as the cryptocurrency continued to rally into the $7,000 range after news of the hack.

The Binance hack was very complicated and well-orchestrated and yet so posed minimal risk to the market as the company managed to recover quickly from the hack.

This clearly shows that exchanges have come a long way since Bitoinica, which wholly dissolved and have engaged in bankruptcy proceedings to this date. Transactions have become more secure, and each hack has proven as a milestone in the growth of digital assets, although it has been a sufferable event for the victims.

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Ritika Sharma
Ritika Kumari Sharma is an Economics Honors graduate from the University of Calcutta. She is completely into finance and believes that cryptocurrencies are the future. She is an enthusiast learner about the cryptocurrency and blockchain technology.

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