Cryptocurrency investors in China

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Yerevan (CoinChapter.com) – Once upon a time, there was a Chinese teenager who lost billions of dollars worth of Bitcoin. But that didn’t stop him from eventually becoming a cryptocurrency icon, as he used his clever IT skills to create what appears to be one of the first and most important cryptocurrency exchanges.

The Story of a Young Crypto Entrepreneur

That’s Zhao Tong, a 16-year-old programmer who became fascinated with Bitcoin a decade ago, largely because the cryptocurrency could be transferred between countries without pesky intermediaries. Still, buying Bitcoin was challenging because there weren’t many cryptocurrency exchanges at the time. And those that were operating, like the now-shuttered Mt. Gox, were plagued by frequent power outages and security issues.

Zhao Tong was one of the customers of Mt. Gox. Unfortunately, he first bought Bitcoin before the infamous Mt. Gox flash crash, which caused the price to drop to $0.01 per token. In doing so, Zhao Tong lost Bitcoin that could be worth $6 billion at current prices.

Zhao Tong launches Bitcoinica

Despite the setbacks, Zhao Tong didn't give up. A self-taught programmer, he built his own Bitcoin exchange, Bitcoinica, in just four days. Bitcoinica was more than just another exchange; it allowed margin trading, letting traders and miners speculate on future prices. Users could bet up to 50 Bitcoins instantly.

Within days, Bitcoinica's trading volume soared. Its monthly trading volume reached $40 million, second only to Mt. Gox. Zhao Tong made $10,000, or about 2,000 bitcoins, in just two weeks.

Security issues

However, not everyone believes in Bitcoinica. Some are concerned about Zhao Tong’s age and experience, and question the security measures in place. One forum user wrote:

Despite the skepticism, Bitcoinica traded hundreds of thousands of bitcoins each month. But when Zhao Tong was approached by investors in late 2011, he sold the company. He was still in school, busy with exams.

The new owners, Wendon Group, expressed concerns about Zhao Tong’s work. They sought help from experienced Bitcoin developers to audit the exchange. One of them was Amir Taaki, a hacktivist activist who openly supports WikiLeaks and 3D-printed guns.

The Wendon Group wanted to demonstrate their commitment to Zhao Tong and Amir by investing heavily. They even paid $1 million for the industry’s most sought-after domain name, Bitcoin.com.

Catastrophic hack

Before the ink was dry, Bitcoinica was hacked, losing 43,000 bitcoins in March 2012. The loss adorned the cover of the second Bitcoin Magazine.

It got worse. Later in March of the same year, Bitcoinica’s servers were hacked twice more. The thieves stole 48,000 bitcoins. There were no hardware wallets or multi-signatures back then: the hackers only had to reset a few passwords.

Afterwards and Zhao Tong's legacy

Who is to blame? Zhao Tong? Wendon Group? Amir? Users don’t care, they just want their Bitcoins. Some lost over 24,000 Bitcoins.

Today, what happened remains a mystery. Zhao Tong stressed the need for Bitcoin users and businesses to strictly protect personal security. He said: "Bitcoin users and businesses need to take personal security seriously."

Zhao Tong’s reputation was ruined. His name became one of the first viral Bitcoin memes. Among old-timers, the phrase “Zhao Tonged” was used to describe investors who had been robbed and defrauded.

The Importance of Security in the Cryptocurrency World

Zhao Tong’s last move was to take 1,000 bitcoins and invest them in a rare solid gold Casascius coin. He owns one of only three of these treasures, which are worth more than $60 million today. Then, he left the industry.

Today, exchange hacks continue. Serious Bitcoin investors recommend using hardware wallets or multi-signature escrow. These setups can reduce the risk of an exchange being hacked.

It is estimated that more than 1 million Bitcoins worth $65 billion were lost in the exchange hack, making Bitcoinica the third largest hack of all time in terms of the number of Bitcoins lost.

Today, Bitcoinica remains a $6 billion warning. Take your custody seriously. Use multi-sig security. Don’t get “Zhao Tonged.”