Having crossed Green Bay and successfully navigated Death's Door, a notoriously dangerous passage at the tip of Door County, the Nilsson turned south and headed for Chicago, while sailing just off the Door County Peninsula's eastern shore. By the time she passed the Sturgeon Bay ship canal, the weather had deteriorated into a blinding snowstorm with gale -force winds and high seas.

Unable to enter the canal due to the storm, Captain Hammer decided to turn north and run before the storm. His intention was to retrace his course 20 miles back up the Door County coastline to the protective shelter of Baileys Harbor. Preparing for a desperate run to safety, Captain Hammer ordered all sails single reefed (partially lowered to prevent storm damage) and turned the Nilsson north.

As the schooner fought her way toward relative safety, the force of the gale and the blinding blizzard caused the Nilsson's course to be too far to the west and dangerously close to the east shore of Baileys Harbor. Finally discerning his vessel's perilous position, Captain Hammer attempted to sail eastward to avoid the Outer Reef at Baileys Harbor and gain adequate "sea room" to maneuver. His effort failed, however, and at 8:30 a.m. on 24 October 1884, the Christina Nilsson struck hard upon Outer Reef and began to founder.

The anchor was quickly dropped, causing the vessel's stern to swing around and strike hard on the reef a second time. The Nilsson sank immediately in 15 feet of water. Due to the relatively shallow depth, the vessel literally pounded to pieces.

Without any possessions and with no assistance from shore (the Baileys Harbor life-saving station would not be built for another 13 years), all eight crew abandoned the stricken vessel and made their way in the Nilsson's yawl -boat to a small island where they obtained refuge. No lives were lost.