Though they come and go, few have collapsed and burnt quite as brilliantly as Cryptsy did. Once a hive of activity for alt-coin aficioners, this digital currency trading platform became a terrifying lesson about trust in the still-wild digital frontier. Discover this.
When Bitcoin was still getting established back in 2013, Cryptsy emerged. Offering trading pairs for dozens of alternative cryptocurrencies that bigger exchanges overlooked, the company created a niche. Giants like Mt. Gox concentrated on Bitcoin, while Cryptsy became the go-to location for traders hunting unusual digital coins including names like Dogecoin, Feathercoin, and many more that have since disappeared into the digital ether.
On the platform, traders crowded in. Peak Cryptsy claimed over 200,000 registered members and handled millions in daily trade volume. Often attending industry conferences and building an image of accessibility compared to bigger corporate exchanges, the site's creator became somewhat famous in crypto circles.
But late 2015 saw beginning of fissures. Users grumbled over delays in withdraws. Weeks passed with unanswered support tickets. The corporation blamed database faults and "technical issues". Red flags ran rampant.
Then the bombshell came down in January 2016. With over 13,000 Bitcoin and 300,000 Litecoin taken—worth around $6 million at the time—Cryptsy declared it had been hacked months earlier. The trade fell virtually over night.
Later court records showed a far more messy picture. Allegedly spending months buying fancy residences and cars, the founder had been draining money from the exchange. The claimed "hack" narrative began to seem rather suspiciously like a cover for clear theft.
Following was a narrative of lawsuits, frozen assets, and investigations. The narrative veers sideways when the entrepreneur allegedly left to China, leaving behind enraged investors and a digital breadcrumble trail for police to follow.
Eventually, certain assets—including cash and real estate—were recovered in a class-action lawsuit; most consumers never saw their money returned. The bitcoin community had weathered exchange failures before—Mt. Gox most notably—but Cryptsy's fall seemed different. It was not only incompetence; the data suggested deliberate dishonesty.
The Cryptsy catastrophe brought attention to obvious issues with the bitcoin ecosystem. Users had any practical means of confirming whether transactions really carried their reported reserves. Exchange operations received no supervision. The slogan "be your own bank" ran counter to the reality most traders chose convenience above security, keeping coins on exchanges rather than in personal wallets.
The fallout fundamentally impacted the way those who love cryptocurrencies handled trade risk. Sales of hardware wallets shot up. "Not your keys, not your coins" came to be a rallying cry. To reduce vulnerability, smart traders started separating their holdings among several platforms.
Exchanges going forward had to change. Standard procedure now is proof-of-reserve audits. Techniques for cold storage become better. Security policies evolved to become more advanced. Every exchange failure imparted hard lessons that strengthened the sector over time.
The scene of cryptocurrencies now hardly reflects the Wild West period when Cryptsy was active. Major exchanges today keep open proof-of-reserve systems, go through frequent security checks, and hold insurance coverage. Once a side issue, regulatory compliance now rules for major players.
Still, the Cryptsy warning story has relevance. Modern exchanges have elegant interfaces, but underlying them are same basic security issues. Are users able to really confirm that their assets exist? Are monies correctly separated? Should founders vanish or servers find themselves compromised, what follows?
Although the market for cryptocurrencies has developed since the height of Cryptsy, trust is still its rarest tool. Unaware of its deadly past, new users arrive in the space. They have not gone through the gut-wrenching sensation of logging into an exchange to discover abruptly disabled withdrawal buttons at zero or zero.
The legacy of cryptsy is stark: without confidence and security, invention and convenience are nothing. The amazing fall of the exchange helped define the more robust bitcoin infrastructure of today. Sometimes the most important lessons the market picks up come from its biggest mistakes.
Although the landscape of cryptocurrencies will always alter, the basic issues Cryptsy's absence raises remain same. In what proportion should consumers rely on centralized entities? Which security policies fairly strike a mix between protection and convenience? Can technology really address issues of human credibility?
Perhaps Cryptsy's most important contribution was illustrating exactly why such developments became required in the first place as blockchain technology advances with distributed exchanges and non-custodial trading platforms.
