In June 2011, the speculative craze was brought to a screeching halt by the hacking of Mt. Gox, which took the platform offline for a week. Then, the MyBitcoin shutdown fiasco at the end of July finally triggered the bursting of the bubble and led to bitcoin's first real bear market. In the days that followed, the price soared to $6. It finally fell to $2 in November.

This bursting of the "Great Bubble of 2011" naturally attracted the attention of the press, which was quick to declare Bitcoin unviable. But it was also conducive to economic construction, and the period of price stagnation enabled the development of financial projects that later bore fruit.

In this chapter, we'll analyze just a few of these projects. We'll analyze how the Bitcoinica margin trading platform brought leverage and short selling to Bitcoin users. We'll analyze the role of the BitInstant instant buy-sell service in making foreign exchange more fluid for Americans. Finally, we'll explain how the independent exchanges GLBSE and MPEx made fund-raising possible within the ecosystem. But first, let's talk a little about the media's treatment of the deflating bubble, which wasn't kind to Bitcoin.

After peaking at $32 on June 8, the hacking of Mt. Gox and the closure of MyBitcoin brought the speculative movement to a definitive halt. The price collapsed to $6 in early August. Bitcoin's exposure to the world, coupled with the falling exchange rate, gave good reason to criticize the cryptocurrency, which journalists thirsting for sensationalism were quick to do.

On August 7, Timothy Lee, writer for tech news site Arstechnica and Bitcoin skeptic since April, published an article entitled "The Bitcoin Crash" in which he explained that bitcoin "the currency doesn't seem to have any fundamental value at all" and that "there's no logical stopping point to Bitcoin's price decline", the process being, according to him, "it's terminal". His argument was retrieved the following day by Nicholas Jackson in The Atlantic, for whom "The Bitcoin Economy Is Collapsing With No Sign of Recovery", and by Adrian Covert on Gizmodo, who argued that "the honeymoon is over" and that "The Bitcoin Is Dying".

In the meantime, other criticisms were emerging, more at the macroeconomic level. In September, James Surowiecki, an American journalist known for having published The Wisdom of Crowds in 2004, published an indictment of Bitcoin in the MIT Technology Review. He criticized the fixed limit on the number of bitcoins, arguing that it encouraged hoarding, would prevent it from becoming a medium of exchange, ultimately creating a situation where "the vast majority of bitcoins are held by people hoping to sell them to other people". On September 7, Paul Krugman, neo-Keynesian economist and winner of the 2008 Nobel Prize in Economics, repeated this reasoning in an article published on the New York Times website, entitled "Golden Cyberfetters". The title was a reference to Barry Eichengreen's 1992 book Golden Fetters, which argued that the Great Depression of the 1930s was the consequence of the overly restrictive gold standard. In the article, Paul Krugman argued that "Bitcoin has created its own private gold standard world, in which the money supply is fixed rather than subject to increase via the printing press" and that the resulting deflation caused "the actual value of transactions in Bitcoins has fallen rather than rising. In effect, real gross Bitcoin product has fallen sharply".

On October 17, the price of BTC fell sharply below $3.2, representing a drop of more than 90% from the peak of the bubble, a fact that Timothy Lee reminded readers the following day. Still on Arstechnica, he described the problems associated with cryptocurrency use, such as hacks and volatility. He didn’t think much of Bitcoin, because stating "But the value of a currency is built on its reputation, and five months of bad news and depreciation have done serious damage". In the same vein, an article in The Economist with the title "The bursting of the Bitcoin bubble" was published on October 21.

In the month that followed, the exchange rate struggled to bounce back, reaching a new low of around $2 on November 18. On November 23, editor Benjamin Wallace published a feature article in Wired entitled "The Rise and Fall of Bitcoin", which, beyond its deliberately teasing title, was a very well-crafted piece that addressed the problems faced by Bitcoin users. It was a difficult time for miners in particular, who bought graphics processors over the summer, but were finding that it was no longer profitable to mine with them. Some were even forced to sell their equipment.

However, despite the price drop and the criticism, the heart of the community was still active, and was taking the extreme price volatility philosophically. Bitcoin's most fervent supporters were committed to participating in its construction and making it flourish. Some members of the community, such as Amir Taaki, compared the phenomenon to the "Gartner's hype cycle", which describes how the adoption of an emerging technique must pass through a "peak of exaggerated expectation", then through a "pit of disillusionment" to finally reach a "plateau of productivity", as was the case with the Web and the Internet bubble.

Gradually, the price climbed back up to exceed $4 again at the end of December, so much so that the online press was forced to admit that Bitcoin was not dead. On December 21, Timothy Lee wrote that "the currency's apparent stability over the last month has inspired him to give it a second look". In particular, he reflected on the value of bitcoin, which he saw not so much as an "alternative currency", but as a "metacurrency" allowing "low-cost and regulation-free transfer of wealth between nations", in competition with Western Union.

During the bear market, the number of foreign exchange platforms multiplied. In addition to those launched during the bubble's bullish phase, several other platforms emerged during the summer. These included BTC-e, launched by Russians Alexander Vinnik and Aleksandr Bilyuchenko on August 7; Bitstamp, launched by Slovenians Nejc Kodrič and Damijan Merlak on August 19; and Crypto X Change, inaugurated on November 10 by Australians Ken and Colin Armitt.

However, the Mt. Gox platform remained largely dominant. This posed a problem for (many) Western customers, as the platform was based in Japan, and deposits and withdrawals required international transfers that could take days to complete. And PayPal censored all bitcoin exchange activity.

This was the problem that a 23-year-old Welsh developer called Gareth Nelson (aka GarethNelsonUK on the forum) was trying to solve with an instant currency exchange service to be known as BitInstant. Gareth discovered Bitcoin during the spring. After becoming interested in mining, he encountered himself the difficulty of sending money to Mt. Gox, and carried out an over-the-counter exchange to obtain bitcoins.

At around 4 a.m. on June 13, Gareth Nelson published on the forum an idea for a "fast payment service for Mt. Gox" service. The idea was to set up an intermediary to transfer funds to the exchange platform once they had been received in the country of origin, typically the USA. He wrote:

He knew he had the technical skills to put this idea into practice, but lacked the money to make it viable. So in his message, he said he was looking for investors to get it off the ground. And this immediately attracted the attention of a 21-year-old New Yorker named Charlie Shrem.

Charlie Shrem comes from a strict Syrian Orthodox Jewish family (https://fortune.com/2017/06/26/bitcoin-blockchain-cryptocurrency-market/), and grew up in the Midwood neighborhood of Brooklyn. His father worked for a jewelry retailer. Shy and awkward as a child, he took refuge in computers, taught himself to code and made a name for himself on hacker forums. During his high school and university years, he helped launch a number of businesses, including Epiphany Design and Production, a printer and computer repair service; and Daily Checkout, an e-commerce site for electronics founded in March 2009. It was then that he discovered his commercial flair.

In 2011, Charlie attended Brooklyn College, where he studied for a degree in economics and finance. He was still living in the basement of the family home. According to him, he first heard about Bitcoin in 2009, when the charity he worked for, Tikvot, had its PayPal account frozen. He also saw mention of it in the hacker circles he frequented on IRC. However, his attention wasn't really caught until he discovered Silk Road via the Gawker article published on June 1, 2011. A few hours after the article appeared, he published a tweet that he wanted to buy some bitcoin; being a cannabis user himself, he was probably looking to give the platform a try. On June 10, he registered on the Bitcoin forum, under the pseudonym Yankee.

So when Gareth published his advert on June 13, Charlie was all ears. He contacted Gareth and they quickly came to an agreement. For his part, Charlie asked his parents for a $10,000 loan; his father refused, but his mother accepted. That same evening, Gareth announced that he had found an investor in Charlie Shrem and revealed the name of the project: BitInstant.

They developed the service over the summer. On August 23, after a two-week beta phase, BitInstant opened its doors to the general public. The company benefited from a partnership with foreign exchange platform TradeHill, enabling instant transfers to the latter using Liberty Reserve or Dwolla. On November 21, Mt. Gox was finally added as an option to the service.

At the same time, Charlie Shrem was promoting the startup as a co-founder. In August, he attended Bruce Wagner's conference in New York, and met several players in the ecosystem in person. In September, he attended the Open Video Conference organized by the Mozilla Foundation and New York Law School, to speak at a workshop on alternative currencies. The following month, he appeared on the Bitcoin Show to present BitInstant.

In December, BitInstant realized a round of financing from angel investors (or business angels). The most important of these was none other than Roger Ver, who acquired 15% of the company for $120,000 and quickly became its marketing director. Roger Ver advised Charlie Shrem to hire Erik Voorhees, who became the company's head of communications and marketing in February 2012. Ira Miller also joined the team as a developer. Although Charlie Shrem was not politically motivated as such, the association with these people would have the effect of altering his perception of politics.

At the start of 2012, BitInstant diversified its money transfer methods to interact with the main platforms in the ecosystem, notably adding cash deposit to its offering, and began to become popular. On January 2, the volume transferred since opening was $1.2 million, which was a good start. In a sign of good business health, a new interface went live at the end of March.

At the end of summer 2011, existing exchange platforms only offered ways of exchanging traditional currencies with bitcoin, and did not integrate any advanced financial operations. In particular, they lack a platform for margin trading, leverage and short selling. The Bitcoinica platform was created to meet this need.

Bitcoinica was launched on September 8, 2011 by a 17-year-old Chinese boy called Zhou Tong, whose real name was Ryan Tong Zhou. He was a gifted student in Singapore. He was inspired by personal development, having read Robert Kiyosaki's Rich Father, Poor Father and developed an interest in the lives of successful entrepreneurs such as Tony Hsieh (of Zappos) and Steve Jobs (of Apple). He also had a background in web development.

He heard about Bitcoin in late 2010, but didn't really get interested until the following summer, when the speculative bubble was raging. He bought his first bitcoins at $8 each in August. And he invested in the Bitcoin economy, developing Bitcoinica within a week.

He presented Bitcoinica as an "Advanced Bitcoin Trading Platform", which was "Elegant. Professional. Revolutionary". The platform did not initially manage wallets, bitcoins were held in a dedicated account on Mt. Gox account. Deposits and withdrawals were made in bitcoins, by redeemable Mt. Gox codes or by international bank transfer.

It was a success right from the start. In the first 24 hours, 3,724 bitcoins were exchanged by 290 different users, equivalent to $19,000. Volume over the first 7 days was 160,865 bitcoins, or over $800,000, making Bitcoinica the second-largest trading platform in terms of dollars exchanged, behind Mt. Gox.

The platform notably hosted speculative activity: leverage made it possible to multiply gains (and losses), which suited large players willing to bet everything on a price movement. Speculative success was such that liquidation on the platform acquired its own nickname: "get Zhou Tonged". This expression gave its name to the Youtube channel Zhou Tonged, which was launched in March 2012 to host musical parodies about Bitcoin and trading. The platform also had the advantage of offering short selling, enabling economic players (such as merchants holding bitcoin in reserve) to hedge against a possible drop in the price.

In early March 2012, Bitcoinica accepted more than a dozen deposit and withdrawal methods, including bitcoin directly, Liberty Reserve, PerfectMoney, Pecunix, as well as SEPA transfers in euros. It now had almost as much volume as Mt. Gox.

In 2011, Bitcoin's lack of need for authorization led community members to imagine uses that went beyond simple monetary exchange and speculation. They were looking to liberalize investment by providing a means of issuing shares and bonds for companies in the ecosystem. The aim was to circumvent regulations imposed by the Securities and Exchange Commission in the United States (the American equivalent of the AMF), by taking advantage of Bitcoin's innovative character and the legal vagueness that surrounded it. The idea was to create an alternative model to the classic financial system, which could be self-entrenching according to the agorist approach.

One of the individuals involved in this movement was James McCarthy, who used the pseudonym Nefario on the Bitcoin forum, in reference to the character of the same name in the animated film Despicable Me. Nefario was an Irishman living in China, with a job as an English professor at a university. He was interested in the Austrian school and the ideas of the cypherpunks, declaring himself to be "something of a cypherpunk". He discovered the existence of Bitcoin during 2010 and mined over a thousand of them. He then got involved in several projects, including the Bitcoin Weekly online magazine project.

In April 2011, James launched GLBSE (pronounced glib-zee), an acronym for GLobal Bitcoin Stock Exchange. Users interacted with the platform's server via a command-line interface. The client was a modified version of software developed by Amir Taaki. According to the website, the platform allowed "Issue shares to raise capital; Pay dividends to shareholders; Put resolutions to shareholders and get their vote; Issue and sell bonds; Borrow and lend to the market; Make and recieve loan repayments; Issue futures contracts; Meta-trade on non listed companies (on other exchanges); And trade all of the above with other traders on the market".

The first "IPO" (Initial Public Offering) was carried out from April 30 by a project called Ubitex, an in-person foreign exchange platform connecting buyers and sellers present in the same region. The operation involved selling a certain number of shares (in this case 1,000) for bitcoins, in exchange for which shareholders would benefit from the company's profits. The project's sole developer, Nathaniel Theis aka Cuddlefish on the forum, raised 1,100 BTC in this way, amounting to approximately $10,000. However, he was only 14 years old and lacked maturity: he briefly set the service up and running, but ended up suddenly disappearing when his computer broke down in July, giving no sign of life and failing to repay investors.

Despite this, GLBSE continued to operate. By early autumn, some 30 assets were available for exchange. In March 2012, a version 2 of the platform was released.

Another such project to emerge some time later was MPEx, the creation of a highly controversial figure by the name of Mircea Popescu. Romanian, originally from Transylvania, he was a prolific writer on his blog Trilema: he wrote on all subjects (philosophy, politics, sexuality), in a deliberately provocative style, initially in Romanian. He became interested in Bitcoin in the summer of 2011 and began to talk about it on his blog.

In August, Mircea opened "Mircea Popescu's BTC Options Trading Emporium" (MPOE), which offered BTC call and put options. It copied a similar service called Bitoption.org, launched in May. The platform was profitable overall, making over 140 BTC in net profits over six months.

At the end of February 2012, he proceeded with a fundraising by issuing shares and bonds, raising over 3,200 bitcoins, or around $16,000 at the time. On April 11, after a beta phase, the platform finally became a bitcoin exchange allowing the issuance and trading of various stocks, and was renamed MPEx(for "Mircea Popescu's Exchange").

The platform would go on to achieve a certain degree of success and would notably host the “IPO” of SatoshiDICE, the online casino operated by Erik Voorhees. It evolved over time, integrating futures contracts in December.

The bear market that followed the bursting of the great bubble of 2011 was a difficult time for the Bitcoin community. The dollar price fell by over 90% from its June peak, and the online press took the opportunity to disparage the cryptocurrency.

Despite low morale, it was a good time to build. A host of financial services, such as BitInstant, Bitcoinica and GLBSE, contributed to the subsequent success of Bitcoin. The entrepreneurs involved quickly became pillars of the community, staunchly supporting Nakamoto's creation.

Moreover, this economic progress was accompanied by technical development supported by the programmers. In addition to the evolution of the main software (a subject we'll deal with later), the period was also marked by an improvement in the use of Bitcoin due to the development of wallets. This is the subject of the next chapter.