February 2014 – Mt Gox was the largest bitcoin exchange in the world. The company was responsible for over 70% of the world’s trading volume, making it the go-to place for thousands who wanted to buy and sell. This time, however, the customers were frustrated, angry, and scared – Mt Gox had stopped all bitcoin withdrawals. The exchange cited technical issues, but given the history of a prior hacking incident, users could not shake off the feeling that something was wrong.
A couple of weeks went by, when suddenly, Mt Gox suspended all trading. The website just went offline. As users were starting to wonder what was going on, a leaked document surfaced, revealing the company had lost over 800,000 bitcoins to hackers, worth $460 million.
It was the biggest crypto theft in history. Bitcoin investors were scared shirtless – many lost their money. Anyone who had thought about investing in bitcoin earlier were glad they didn’t. The public vowed to never touch it with a 10-foot pole. And with that, the largest price correction for the cryptocurrency was set into motion.
From November 2013 to January 2016, bitcoin’s price went from $1,163 to $152 – a whopping 86.9% drop. This may seem insignificant, considering bitcoin is now worth $40,000 each, but imagine if the same thing happened today. Imagine if bitcoin crashed to $5,000. Many investors, even institutions with “diamond” hands, will be spooked. For retail investors like you and me, try telling your spouse you lost over 80% of your investment. Leveraged traders who went long would be absolutely “rekt”.
However, a quick glance to the past would tell us that there may be nothing to worry about. Even the unluckiest investors who got in at the top in 2013 and lost more than four fifths of their money within two years, would have made a 34x return had they “hodled” on. That kind of gain is unheard of anywhere else. Only in cryptoland.
The fundamentals behind bitcoin did not change. The Mt Gox users who stored their crypto in their “cold” wallets were saved. The rest of the bitcoin on the blockchain were untouched. The community developing and maintaining the network was alive and kicking. The only thing that changed was people’s perception. They were paralyzed with fear.
Fear and greed are just part and parcel of the market’s boom and bust. Forbes and Gawker publish news on bitcoin – prices skyrocket. Mt Gox gets hacked and China bans the cryptocurrency – prices plummet. ICO’s are the next big thing – “let’s go all in”. Turns out many of them were scams – things hit the fan. Tesla accepts bitcoin as payment – “we love you, Elon”. He says “just kidding, no we won’t.” – everyone wants him dead.
There are underlying strengths and weaknesses, opportunities and threats, behind cryptocurrencies. Understanding them helps you tell the fundamentals apart from the noise. “Be fearful when others are greedy, and be greedy when others are fearful”. Do no panic sell, and do not invest more than you can afford to lose. “Good things happen to those who wait”, and “strike while the iron is hot”.
The more you can learn about these fundamentals, the better off you will be – just learn from crypto investors during the Mt Gox hacking incident.