In 2010, a Chinese teen bought #Bitcoin for $10
He went on to build the 1st crypto margin exchange
In 2010, a Chinese teen named Zhao Tong bought Bitcoin for $10. He was fascinated by the idea that money could be sent globally and quickly told all his friends because it was "cool."
At just 16, Zhao faced challenges in buying Bitcoin in 2011. The largest exchange, Mt. Gox, was often offline, and a flash crash even dropped Bitcoin's price to $0.01.
A self-taught coder, Zhao built Bitcoinica in four days. It wasn’t just another Bitcoin exchange; it allowed for margin trading, enabling traders and miners to speculate on future prices with up to 50 BTC instantly.
Bitcoinica quickly soared in volume, trading up to $40 million a month, second only to Mt. Gox. Zhao earned $10,000, or about 2,000 BTC, in the first two weeks alone.
Despite Bitcoinica’s success, concerns arose about Zhao’s age and experience, especially regarding the exchange's security. When investors approached him in late 2011, Zhao sold the company to focus on school exams.
The new owners, Wendon Group, sought help from veteran Bitcoin developers, including Amir Taaki, to audit the exchange. They invested heavily, even buying the Bitcoin.com domain for $1 million.
However, in March 2012, Bitcoinica was hacked, losing 43,000 Bitcoin. Two more attacks later that month stole another 48,000 Bitcoin. At that time, without hardware wallets or multisig, the hacker simply reset a few passwords to steal the funds.
Users demanded answers and their Bitcoin back, but the exact details of the hacks remain a mystery. Zhao emphasized the need for serious personal security in the Bitcoin space.
Zhao’s reputation was destroyed, and his name turned into one of the first viral Bitcoin memes. The phrase “Zhao Tonged” describes investors who have been robbed and cheated.
In his final act, Zhao invested 1,000 Bitcoin in a rare solid gold Casascius coin, one of only three, now worth over $60 million. Then, he left the industry.
Exchange hacks still happen today, making hardware wallets and multi-sig custody crucial for serious Bitcoin investors. More than 1 million Bitcoin, or $65 billion, have been lost in exchange hacks, with Bitcoinica being the third-largest loss ever.
Bitcoinica's $6 billion loss is a stark reminder: take custody seriously and use multi-sig security. Don’t get Zhao Tong’ed.
What is a Crypto Wallet?
Kevin’s story highlights the importance of understanding and using a crypto wallet. A cryptocurrency wallet is a digital tool that allows you to store, send, and receive crypto securely. It doesn't store the actual crypto but the private keys needed to access the crypto assets on the blockchain.
How Does a Cryptocurrency Wallet Work?
1. Public and Private Keys: Each wallet has a public key (like an account number) and a private key (like a password). The public key is used to receive funds, and the private key is used to access and manage them.
2. Types of Wallets:
- Hot Wallets: Connected to the internet (e.g., mobile, web, and desktop wallets). They are convenient but less secure.
- Cold Wallets: Offline storage (e.g., hardware and paper wallets). They are more secure but less convenient for frequent transactions.
3. Transactions: When you send crypto, the wallet uses your private key to sign the transaction, ensuring it is authorized and secure.
4. Security: Keeping your private key secure is crucial. If someone gains access to your private key, they can control your crypto.
Why Use a Cryptocurrency Wallet?
- Control: Unlike exchanges, a wallet gives you full control over your private keys and, therefore, your funds. This means you're not relying on a third party's security measures.
- Security: Wallets, especially cold wallets, provide a high level of security. They're not connected to the internet, making them less vulnerable to hacks.
- Privacy: Wallets offer more privacy since you don’t have to provide personal information as you would with exchanges.
- Backup: Most wallets allow you to create a backup phrase or seed phrase. If you lose access to your wallet, this phrase can help you recover your funds.
Choosing the Right Wallet
- Hot Wallets: Suitable for everyday transactions and frequent access. Examples include mobile wallets like Trust Wallet and desktop wallets like Electrum.
- Cold Wallets: Ideal for long-term storage. Examples include hardware wallets like Ledger and Trezor, and paper wallets.
- Multi-Signature Wallets: These wallets require multiple keys to authorize a transaction, providing an extra layer of security. They are often used for business purposes.
Best Practices for Wallet Security
1. Backup Your Wallet: Always create a backup of your wallet and store the backup phrase securely.
2. Use Strong Passwords: Protect your wallet with a strong, unique password.
3. Enable Two-Factor Authentication: If your wallet supports it, enable two-factor authentication for added security.
4. Keep Software Updated: Ensure your wallet software is always up to date to protect against vulnerabilities.
5.Beware of Phishing Scams: Be cautious of phishing attempts. Always verify the authenticity of websites and applications.
