As past cryptocurrency exchange hacks taught us, such events exert great force to disrupt Bitcoin’s stability. This time, a massive KuCoin hack and a big governmental reprisal in the form of CFTC charging BitMEX transpired in a short time span. Surprisingly, this did not affect BTC’s value as one would think. Do we owe this to the maturity of BTC holders — or other factors?
How Exchange Hacks Impact the Price of Bitcoin
If there is anything that cryptocurrency holders fear, it’s big events in the crypto-space eroding the confidence in the very concept of cryptocurrencies. These fears almost always materialize from three sources:
Stock market crashes
Negative government intervention
The latter source, crypto exchange hacks, is responsible for many BTC slumps and sell-offs in the past:
Coincheck – in 2018, $534.8 million worth of NEM coins stolen.
Mt.Gox – in 2014, $460 million worth of BTC stolen.
Bitgrail – in 2018, $195 million worth of Nano stolen.
Bitfinex – in 2016, $72 million worth of BTC stolen.
Zaif – in 2018, $60 million worth of BTC, BCH, and MONA stolen.
The above encompass just a few crypto exchanges succumbing to hacks across the world. Like clockwork, these assaults on the edifice of crypto infrastructure resulted in the devaluation of Bitcoin. The biggest one, Mt.Gox, resulted in BTC dropping 36%.
However, the crypto space experienced much more centralization back then. The Mt. Gox exchange alone covered over 70% of BTC transactions globally.
Additionally, you could shout from the mountain tops that no blockchain was actually ever hacked until you were blue in the face. The fact remained: people gave up their private keys to centralized bodies – crypto exchanges – for the sake of user convenience.
User convenience will always be the paramount factor for any new technology to gain mass traction. Accordingly, when the third-largest crypto exchange – BitMEX – comes under the negative scrutiny of CFTC, thus infusing uncertainty, one would think BTC would suffer.
So, why didn’t it happen this time?
$150 Million Worth of BTC and ETH Stolen from KuCoin
As it usually happens when you give out your private keys to crypto exchanges, entrepreneurial miscreants have a much easier time to upscale their looting operation. Last Saturday, KuCoin CEO Johnny Lyu reported as much in a live stream:
Hacker(s) pilfered the private keys for the exchange’s hot wallets
Hacker(s) transferred funds to new wallets
Hacker(s) froze deposits and withdrawals
The Singapore-based crypto exchange later reported that only cold wallets remained untouched, as would befit wallets that can’t connect to the internet. KuCoin is known for trading with almost all cryptocurrencies worthy of note, about 200 of them.
BTC and ETH comprised the bulk of the stolen $150 million funds, with the rest being bitcoin sv (BSV), litecoin (LTC), XRP, Stellar lumens (XLM), tron (TRX), and tether (USDT). As a result of the hack, KuCoin’s own exchange token KCS dropped by 14%, but this is the extent to which the ripple of the hack was felt in the crypto space.
BitMEX Under the Gaze of CFTC
On October 1st, the United States Commodity Futures Trading Commission (CFTC) charged BitMEX with violating anti-money laundering (AML) procedures, among other infractions, and operating as an unregistered trading platform. Consequently, the CFTC filed a civil enforcement action against Seychelles-registered BitMEX, the world’s third-largest crypto exchange.
The charge covers BitMEX’s activities all the way back to 2014, as it allegedly illegally facilitated leveraged trading worth $1 trillion. However, this charge should not be surprising to those who paid attention. In 2019, the CFTC was probing the exchange, under suspicion it circumvents the formal ban that prohibits U.S. citizens from using BitMEX services, among a host of other nations.
The Department of Justice had already arrested BitMEX’s CTO, Samuel Reed, last Thursday, while the three other BitMEX co-owners – Gregory Dwyer, Arthur Hayes, and Benjamin Delo – remain at large. So far, only Dwyer’s lawyer stated that his client will contest the charges.
Indictment Not Affecting Bitcoin’s Value
Despite this dire news for BitMEX top executives, BTC futures show no sign of concern, even though BitMEX still holds a big chunk of the world’s BTC transactions. Up until July 2019, BitMEX held almost half of the cryptocurrency market share. Currently, BitMEX’s share is around 18%, which marks its continued downward trajectory since the March 13 crash, additionally beleaguered with an outage lasting for 25 minutes.
With such cracks in its reputation and decreasing traffic volume, BitMEX’s most recent CTFC woes did not affect BTC as one would superficially expect. Instead, BTC traders are viewing it as an isolated occurrence not relevant to the overall bullish projections toward the $12,000 per BTC threshold.
Moreover, this goes to show that the bullish mood among BTC traders overcame the fact that a major governmental body went full force against one of the world’s top exchanges. In other times, as past experiences taught us, we would see a different impact.
On top of it all, as we near the nation’s most turbulent presidential elections amid an economic recession, such an uncharacteristic lack of impact shows that Bitcoin surpassed an important psychological threshold.
Bitcoin hasn’t changed – but the foundational aspects surrounding Bitcoin, have. For one, it has become more accessible, as even the top forex brokers around the globe now offer access to Bitcoin and other popular cryptocurrencies. Yet there’s something else.
The tools that are necessarily required to use and access Bitcoin have increased in quality, user experience, and security. This is likely the key reason why hacks and arrests which have historically had a negative impact on the price of Bitcoin — are no longer having such an effect.
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.