Mt Gox Hack Causes Bitcoin Price to Plunge 99%

On June 19, 2011, the cryptocurrency world witnessed a dramatic event that sent the price of bitcoin plummeting to below $0.01. This incident, which occurred on the now-defunct exchange Mt. Gox, was a result of a coordinated hacking attack that exploited vulnerabilities in the platform's security.

The hacker, who went by the pseudonym ~cRazIeStinGeR~, offered for sale Mt. Gox’s entire database of user accounts on Pastebin. The next day, the new owner of Mt. Gox, Mark Karpelès, warned of an increase in thefts from user accounts but initially blamed the victims for using weak passwords. However, it was later revealed that the hacker had compromised many accounts for days, if not weeks, before the attack.

An unidentified user on the InsidePro password recovery forums, known as "georgeclooney," was suspected to be the same person who sent bitcoin spiraling. This user had asked for help in cracking hashed passwords from the stolen database, and it was later concluded that they were likely the same person who placed a number of orders to sell hundreds of thousands of bitcoins at once, causing the price to crash.

At exactly 36 seconds past 5:15pm, UTC, the hacker placed a series of sell orders that totaled more than $1.5 million in BTC out of a total daily volume of $1.8 million. The exchange was unresponsive for 30 minutes as it processed these orders, leading to a complete collapse in the price of bitcoin. The hacker then attempted to buy bitcoin back on the way up for more profits, as did other users, driving bitcoin’s price back up to a few dollars.

One user, "Kevin," claimed to have bought 259,684 BTC for $3,000 ($0.016 on average) but was only able to withdraw 643 BTC before Karpelès took Mt. Gox offline to sort through the mess. In the end, Mt. Gox was saved due to its $1,000 withdrawal limits for both US dollars and bitcoins, which contained most of the damage to the platform’s internal, offchain order books.

Karpelès opted to roll back the trading engine to before the compromised accounts began their coordinated dumps, a move which faced controversy at the time. It’s believed up to around 900 accounts may have been affected, and the platform would stay closed until August. The hacker may have known about the withdrawal limits and chosen to crash the price of bitcoin as part of a plot to siphon up to 100,000 BTC, if they were priced at $0.01 apiece, thereby skirting the $1,000 cap. Alternatively, the attacker’s purpose may have been simply to cause mayhem for fun.

This event highlighted the vulnerabilities of early cryptocurrency exchanges and the importance of robust security measures. It also underscored the potential for significant price manipulation in a market with limited liquidity and centralized control. The incident served as a wake-up call for the cryptocurrency community, leading to increased scrutiny and improvements in exchange security protocols.