Bitcoin: The 2011 Crash From $32 to $2

On the night of 19 June 2011, anyone watching the price screen at Mt. Gox saw one bitcoin trade for one cent. A few minutes earlier it had been worth about $17.50. Eleven days before that it had been worth $31.91.

Mt. Gox, a website in Tokyo, was where almost everyone who bought or sold bitcoin did it. It worked like a small online broker: customers deposited dollars or bitcoins, placed buy and sell orders, and the site matched them. For most of 2011 it handled the large majority of all bitcoin trading in the world, so its price was, in practice, the price of bitcoin.

Two months up

Bitcoin was two years old. It is digital money with no bank or government behind it: a shared ledger, kept by thousands of computers, records who owns which coins. New coins go to "miners", people who run computers that keep that ledger in order and are paid in fresh coins for the work, a little like a company paying its bookkeepers in newly printed shares. In 2011 many miners were hobbyists with a home computer.

On 9 February 2011 one bitcoin reached $1 on Mt. Gox for the first time. In mid-March it slipped back to about 70 cents. Then attention arrived. TIME magazine wrote about bitcoin in April. On 1 June the gossip site Gawker published Adrian Chen's story about Silk Road, a hidden website where people bought illegal drugs and paid in bitcoin. Within days Senators Charles Schumer and Joe Manchin wrote to Attorney General Eric Holder and the head of the Drug Enforcement Administration, Michele Leonhart, asking them to shut Silk Road down. Schumer called bitcoin "an online form of money laundering".

None of this was flattering, and all of it was publicity. The price went from under $1 in early April to $10 on 2 June and $31.91 on 8 June, by Mt. Gox's own figures. Hobbyists who had left a laptop mining in 2010 suddenly held thousands of dollars.

The fall started straight away. Within days the price was back near $10, then it climbed to the high teens. On 13 June a user known as "Allinvain" posted on the Bitcoin forum that 25,000 bitcoins, worth roughly $375,000 that week, had been stolen from his own computer. Holding bitcoin, it turned out, meant guarding it yourself, and many people had no idea how.

The one-cent night

Mt. Gox had been started in July 2010 by the programmer Jed McCaleb, on a web address he had bought years earlier for a card-trading site: the name stands for "Magic: The Gathering Online eXchange". In March 2011 he sold it to Mark Karpelès, a French developer living in Tokyo. Karpelès had run it for about three months when the attack came.

The attacker got into an account with administrator powers. Mt. Gox blamed the stolen login of an auditor whose computer had been compromised; later analysis, including a BitMEX Research note, pointed instead to an old administrator account that may have belonged to McCaleb. Either way, the intruder could change the numbers in Mt. Gox's own customer records. They credited themselves with a huge pile of bitcoins that existed only on the exchange's books and offered them for sale at any price. Buy orders were swallowed one after another until the screen showed one cent.

The crash happened only inside Mt. Gox. Bitcoin itself, the shared ledger, was untouched, and other small exchanges kept trading at normal prices. But Mt. Gox was the market. It shut down for about a week, admitted that its user database had leaked online with passwords in scrambled form, and reported that accounts holding the equivalent of more than $8.75 million had been affected. To prove it still had customers' coins, it announced in advance and then moved 424,242 bitcoins out of offline storage in a single public transfer. Trading came back around 26 and 27 June.

Five months down

The exchange survived. Confidence did not. Through July and August a run of failures followed. On 26 July Bitomat, a Polish exchange then ranked third in the world, said it had lost about 17,000 customer bitcoins when a server it rented from Amazon was wiped along with its backups. Mt. Gox took over its customers. A few days later MyBitcoin, a popular online wallet service, simply went offline and its anonymous operator disappeared with users' coins.

Earlier that spring the creator of bitcoin, known only as Satoshi Nakamoto, had told a fellow developer, Mike Hearn, that he had "moved on to other things". He never posted again. The founder was gone, the biggest exchange had been hacked, a rival had lost its customers' money by accident, and US senators wanted the whole thing treated as a drugs racket.

The price drifted down for five months. In November 2011 it touched $1.99, a fall of about 94% from the June high. Someone who had bought $1,000 of bitcoin at the top held about $62 worth. Many of the early miners and buyers sold and left.

What happened next

The low did not last. Bitcoin climbed through 2012 and on 27 February 2013, after about 20 months, it traded above the June 2011 peak for the first time, according to Bitcoin Magazine's report that day. By November 2013 it passed $1,000.

Mt. Gox was not so lucky. It kept its dominant position, kept its weak controls, and in February 2014 it stopped withdrawals and collapsed with about 850,000 bitcoins missing, most of them taken over years by thieves the exchange never noticed. In March 2019 the Tokyo District Court found Karpelès guilty of falsifying records and gave him a suspended sentence of two and a half years; he was cleared of embezzlement. McCaleb went on to co-found Ripple and Stellar.

The 2011 crash set the pattern every later bitcoin crash has followed: a rush of public attention, a price that runs ahead of any use for the thing, a shock that breaks confidence, and a long slide. It also showed, three years early, the weakness that would destroy Mt. Gox: customers handing their money to a website that kept the only record of what they owned.