Lessons from the latest cryptocurrency hack

Thought of the day

by Chief Investment Office 29 Jan 2018

Half a billion dollars in stolen cryptocurrency, a Tokyo Metro police inquiry, and sanctions from the national financial regulator. Yet after Friday’s record heist at Japan’s popular Coincheck exchange, the targeted cryptocurrency, NEM, is worth more today than before the hack.

This could be seen as a sign of cryptocurrencies’ resilience. But we take it as another warning of the risks of this asset bubble:

  • No guarantees. Coincheck has pledged to repay losses, and the stolen coins have been found. Recovery may prove technically infeasible. Recovered bitcoins from the previous record hack, the USD 400m raid on Mt Gox, are frozen in complex legal wrangling.
  • Limited security. With patchy security, exchanges are frequent targets; there were at least five major (USD >30mn) hacks in 2017. Bloomberg reports suggest that roughly USD 1.2bn in bitcoin and ether, the top two cryptos, have been stolen since their inception, citing Autonomous Research estimates.
  • Substitution risk. Before this hack, NEM was relatively unknown, but is a top-10 coin by market value. The supply of such alternatives is potentially unlimited. The market share of bitcoin, the biggest crypto, dropped to 36% in early January from 56% one month before.

Cryptocurrency speculators may be positive in the face of such hacks. Regulators may not be. Japan’s more permissive approach contrasts with aggressive regulations in China and South Korea. With the G20 set to discuss coordinated regulation, a more hostile approach cannot be ruled out. And as the scale of national exposure grows, the potential for regulation as a catalyst that bursts the bubble grows, too.

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