It was rechristened Greytown after the then Jamaican Governor Charles Edward Grey and nominally ceded to the Miskito Kingdom, a British protectorate to the north.

A year later, the town began rapid growth as the eastern terminus of a transport operation owned by American Cornelius Vanderbilt's Accessory Transit Company that carried thousands of travelers each month from the Atlantic to the Pacific side of Central America on their way to San Francisco during the California Gold Rush.

Then, mules, horses, or stagecoaches carried them over the small isthmus between the lake and San Juan del Sur, Rivas on the Pacific where they would embark on ships traveling the coast between Panama and Nicaragua and California.

Greytown was rebuilt after its destruction and, in 1855, the American filibuster William Walker installed himself as President of Nicaragua and took control of the Accessory Transit Company's assets and revoked its charter.

Walker and his followers attempted to retake Nicaragua in November 1857, when they entered Greytown harbor and camped at nearby Puntas Arenas.

The town was legally placed under the sovereignty of Nicaragua and removed from Miskito control in 1860 but remained de facto under British protection through much of the remainder of the century.

The town's geography is influenced by the San Juan River delta with volcanic sediment deposits from Costa Rican volcanoes interacting with ocean currents and winds.