Though failed exchanges abound in the bitcoin graveyard, among early adopters Cryptsy stands out as an especially sad chapter. The explosive growth and even faster fall of this trading platform left thousands of empty-handed investors fundamentally transformed in their view of trust. Explore this topic.
Arriving in 2013, cryptsy was exactly poised to catch the first significant wave of bitcoin excitement. While larger sites stayed with Bitcoin and a few well-known substitutes, Cryptsy followed another route. When diversity was still a novelty, they rapidly assembled an unparalleled collection of digital assets opening their doors to practically any alt-coin developer looking for a trading pair.
This turned out to be brilliant. Hunger for exposure to rare coins drove traders to the venue. Cryptsy boasted almost 200,000 registered users and handled millions of daily transactions at its height. Leader of the platform started to be a regular attendee of industry events, building a reputation as a supporter of the alt-coin movement at a period when Bitcoin maximalism dominated debates.
The first indications of problems emerged slowly. Little withdrawals over several days and then several weeks. Support notes vanished into black holes. Late 2015 saw social media platforms bursting with ever desperate users claiming lost money and frozen accounts. Technical problems, database corruption, and increasing pains—exchanges the community first approved from a platform managing unheard-of trade volume—the corporation blamed.
Then in January 2016 everything broke down. After a huge hack, Cryptsy revealed a shocking blog post alleging months of covert insolvency. Their claims indicate that attackers had pilfers of roughly 13,000 Bitcoin and 300,000 Litecoin months before, roughly $6 million at then-current values but worth hundreds of millions today.
The narrative fell apart very fast. Legal inquiries turned out that the “hack” justification ran counter to growing data. Banking records revealed dubious moves to personal accounts. Property records turned out acquisitions of premium homes. Court records revealed a pattern of action more like intentional plunder of consumer assets than like a security failure.
Allegedly fleeing to China, Cryptsy’s founder left behind furious investors and a trail of incriminating financial documents as users joined together in a class-action lawsuit. Users shut out of almost $5 million in deposits—worth far more in today’s valuation—the company crashed nearly instantly.
The timing and force of Cryptsy’s fall made it especially terrible. This was more than just lost money; it was a basic betrayal of trust during the early years of cryptocurrencies. Earlier exchange disasters such as Mt. Gox could be ascribed to either poor security or ineptitude. Cryptsy seemed different: data suggested intentional dishonesty over an extended period.
The fallout irrevocably changed how people trade cryptocurrencies. Sales of hardware wallets exploded as consumers adopted the motto “not your keys, not your coins.” Rather than depending just on one exchange, smart traders started spreading their assets over several platforms. The community grew more dubious and insisted on more openness from platform administrators.
Exchange agents noticed. Audits with proof of reserve became popular. Methods of cold storage become better. Some systems started exposing wallet addresses so users could independently check ownership. The sector gradually developed protections that ought to have been in place from start.
The crypto scene of today hardly resembles that of Cryptsy’s day. Major exchanges use sophisticated custody solutions, keep insurance money, and schedule frequent security audits. Once an afterthought, regulatory compliance now ranks highest for major players. Still, the basic questions Cryptsy begs still have significance: Are users able to really confirm their possessions? Are money correctly separated? Who keeps an eye on the watchmen?
Most importantly, maybe, Cryptsy’s fall hastened the creation of really distributed trading platforms. The terrible lesson forced developers to design non-custodial exchanges and autonomous market makers that replace the need of trusting platform administrators with money. These devices precisely solve the vulnerability Cryptsy so powerfully revealed.
For experienced crypto users, “getting Cryptsy’d” became the lingua frange for exchange theft or insolvency – a language reminder of lessons acquired the hard way. Often following tragic personal losses, each new wave of crypto enthusiasts must rediscover these terrible lessons.
The narrative reminds us sharply that the promise of trustless interaction from blockchain still runs against the very human issue of centralized control points. Using the void between the practical reality of how people traded digital assets and the trustless ideal of cryptocurrencies, cryptsy sought out
Cryptsy’s legacy goes on as both a warning story and inspiration for creating really trustless trading systems as distributed finance develops. Often the most significant developments in the market come from its most dramatic mistakes. By revealing the ways in which things can go wrong, Cryptsy guided us ahead.