16-year-old Zhou Tong from China founded the Bitcoinica exchange and unfortunately lost 101,554 BTC to theft. In 2010, Zhou Tong bought Bitcoin for $10 and quickly became interested in the idea of a currency that could be sent globally. He introduced Bitcoin to all his friends because he thought it was cool.
At the time, buying Bitcoin in 2011 was difficult and time-consuming, requiring intermediaries. The largest exchange at the time, Mt. Gox, was often offline. Shortly after Zhou Tong bought Bitcoin, Mt. Gox even experienced a flash crash, causing the price of Bitcoin to drop to $0.01.
However, Zhou Tong was not discouraged by the price drop. The self-taught programmer genius built a margin trading platform called Bitcoinica in just four days. It was not just another Bitcoin exchange; it allowed for margin trading, enabling traders and miners to speculate on future prices. Users could instantly bet up to 50 BTC.
After launching, Bitcoinica quickly gained momentum and reached a monthly trading volume of $40 million, second only to Mt. Gox. Zhou Tong earned $10,000 in the first two weeks, equivalent to about 2,000 BTC.
However, Bitcoinica faced some resistance. Some users were concerned about Zhou Tong’s young age, while others doubted his experience. As the value of Bitcoin increased, users became more concerned about the security measures the exchange had in place to protect their Bitcoin.
Bitcoinica continued to trade hundreds of thousands of BTC each month. But by the end of 2011, Zhou Tong sold the company when investors found him. He was still in school and busy with exams.
The new owner, Wendon Group, had some doubts about Zhou Tong’s work. They sought the help of experienced Bitcoin developers, including Amir Taaki, a outspoken activist involved with WikiLeaks and 3D-printed guns.
Wendon Group wanted to prove to Zhou Tong and Amir that they were serious, so they made a significant investment. They even spent $1 million to purchase the highly sought-after domain name: http://Bitcoin.com.
However, Bitcoinica quickly fell victim to hacker attacks. In March 2012, they lost 43,554 BTC. This loss caused a huge uproar and even made the cover of the second issue of Bitcoin Magazine.
The situation worsened when Bitcoinica’s servers were attacked again in May and July of the same year, resulting in the theft of 58,000 BTC. At that time, there were no hardware wallets or multi-signature security measures. The hackers only had to reset a few passwords.
The responsibility for the consecutive attacks was uncertain. Was it Zhou Tong’s fault? Wendon Group’s fault? Or Amir’s fault? Users didn’t care; they just wanted to recover their lost Bitcoin. Users like Roger Ver lost over 24,000 BTC.
Today, it is still a mystery what exactly happened. Zhou Tong’s conclusion is that Bitcoin users and businesses need to take their personal security seriously.
Due to these attack incidents, Zhou Tong’s reputation collapsed overnight. His name became one of the earliest viral Bitcoin memes. “Zhou Tonged” is still used today to describe investors who have been robbed and deceived.
Zhou Tong’s final move was to invest 1,000 BTC in rare Casascius coins. In fact, he owns one of only three of these rare collectibles, now worth over $60 million. Then, he left the industry.
Hacker attacks on exchanges continue to this day. That is why serious Bitcoin investors are advised to use hardware wallets or multi-signature custody. It is estimated that over 1 million BTC, worth $65 billion, has been lost in exchange hacks. Based on the total number of lost BTC, Bitcoinica is the third-largest loss in history.
Today, Bitcoinica remains a cautionary tale associated with the loss of $6.8 billion worth of Bitcoin. Users should take their custody seriously and use multi-signature security measures, learning from the Bitcoinica incident.