#bitcoinfail: Top 10 Failures in Bitcoin History

There are tons of examples of fraud, misrepresentation and outright business failures in the five-year history of the Bitcoin economy.

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#bitcoinfail: Top 10 Failures in Bitcoin History

We started doing a little research last week to build a historical perspective for the Bitcoin community as it exists today, and in that spirit we wanted to take a look at some of the more spectacular scams, failures mess-ups that involve Bitcoin. 

However, we felt the previous list was a bit superficial and based on the responses we received, we decided to expand our list and present a more in-depth analysis of each case.

And really, we could go further than 10. There are tons of examples of fraud, misrepresentation and outright business failures in the five-year history of the Bitcoin economy. Note, too, that we aren’t going to include Silk Road’s bust as a fail because an online black market is kind of doomed from the beginning.

1. Mt. Gox

The biggest fail of them all. Mark Karpeles’ Tokyo-based exchange started in 2010 and by 2013 was handling upward of 70% of all Bitcoin transactions. In February of this year, Mt. Gox suspended all trading activity after months of rumors and speculation that something was wrong. Mt. Gox officials said trading was suspended because some 850,000 BTC had gone “missing,” though about 200,000 BTC were later “found.”

Whether mismanagement, hackers, fraud, or some combination of the three is to blame remains a matter of intense speculation. At the time of writing, 650,000 BTC are unaccounted for, and the company has filed for bankruptcy protection.

Damage: US$402 million, just counting the missing BTC at current exchange rates

2. Bitcoin Savings and Trust

In July 2013, Bitcoin Savings and Trust was exposed as a Ponzi scheme, and one that swindled hundreds of thousands of bitcoins from users (high-end estimates go up to 700,000) by promising 7% weekly returns.

On July 23, the SEC charged Trendon T. Shavers, the trust’s founder and a Texas resident, with running a Ponzi scheme. Here is his mugshot.

Damage: US$154 million to $433 million at current exchange rates

3. Sheep Marketplace

In December 2013, a Silk Road-type of black market called Sheep Marketplace shut down abruptly after the site’s administrator found a bug that someone had exploited to steal 5,400 BTC.

Shortly thereafter, users found what they thought was a wallet connected to the heist that had 96,000 BTC in it, which was especially big news because this was right around the time bitcoin broke through the US$1,000 mark. A wild sheep chase ensued on Reddit, but instead of a thief or even a mythical creature in the north of Hokkaido, all the sleuths had found was one of BTC-E’s wallets.

The Guardian’s Alex Hern reported in December the thief most likely cashed out those bitcoins for fiat money quickly.

Damage: US$59.4 million at current exchange rates

4. MyBitcoin

One of the biggest Bitcoin heists came during the currency’s early days in 2011, when MyBitcoin, one of the earliest wallet services, shut down in July, and a notice was posted that 51% of the bitcoins it held had been stolen. This amounted to nearly 79,000 BTC. Whether the bitcoins were stolen by a third party or MyBitcoins was a scam all along has never been conclusively decided.

Damage: US$48.9 million at current exchange rates

5. Bitcoinica Hacks

Almost 59,000 BTC were stolen in a pair of hacks against online service Bitcoinica in March and May 2012. By August 1, the company entered receivership under New Zealand law.

Damage: US$36.5 million at current exchange rates

6. Neo & Bee

Cypriot startups Neo & Bee (two companies working together) launched with a ton of hype in the spring of 2014 as they set out to create both a network of brick-and-mortar branches (read: banks) as well as a robust payments system.

Weeks later, CEO Danny Brewster disappeared to the UK, and with him thousands of bitcoins that customers deposited. All Neo & Bee employees soon quit, and a couple of them publicly spoke out about having been “misled” by Brewster, who was by then wanted by Cypriot police. Brewster’s whereabouts are currently unknown.

Damage: Unknown, though about 9400 BTC were raised as an initial investment, which is US$5.8 million at current exchange rates

7. Silk Road 2 Theft

...but we can include the missing 4,400 BTC from the Silk Road 2 marketplace in just before Valentine’s Day 2014 because that was a case of theft. The official explanation was that hackers exploited a transaction malleability issue, but many contend that the theft was more likely an inside job.

Damage: US$2.72 million at current exchange rates

8. BitInstant

Even before founder Charlie Shrem’s arrest, his company was in trouble. The startup was founded in 2011 to make it easy to quickly pay fiat money into Bitcoin exchanges. By 2013, it had 16 employees and a US$1.5 million Winklevoss investment to its name. But by June of that year, thousands of customer complaints were coming in, and a class-action lawsuit was filed against the company on behalf of customers for failing to render services and misrepresentation.

Damage: Unknown

9. Butterfly Labs

There have been two class-action lawsuits filed against Bitcoin mining-equipment company Butterfly Labs for taking pre-orders then either failing to ship the paid-for miners or shipping them too late. Many customers lost money simply as a result of the opportunity costs of the late shipping. Additionally, the company recently purchased the Bitcoin centric blog/spoof site Buttcoin.org and allegedly tampered with the content to put the company in a more positive light.

Damage: Pending the outcomes of the class action suits

10. Leah McGrath Goodwin Mistakenly Outing Dorian Nakamoto

In early March 2014, Newsweek reporter Leah McGrath Goodwin broke a huge story naming Dorian Satoshi Nakamoto of California as Bitcoin’s creator.

That turned out to be false, though Newsweek’s editors stood behind the story far longer than they should have. Also, that story highlighted with great irony the role trust plays between reader and publication, a lesson many are learning again this week the hard way.

Damage: “I am trying to recover from prostate surgery in October 2012 and a stroke I suffered in October of 2013,” Nakamoto told reporters in March. “My prospects for gainful employment have [sic] been harmed because of Newsweek’s article. Newsweek’s false report has been the source of a great deal of confusion and stress for myself, my 93-year old mother, my siblings, and their families.”

Fortunately, that story did have a happy ending

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