For better (and more often) worse, the price of bitcoin was all but inseparable from one of its major exchanges in August.
Bitcoin prices fell close to 20% to start the month, a steep decline that coincided with the hack of Hong Kong-based bitcoin exchange Bitfinex, one of the most heavily traded on the network globally.
As it would come to light, the security breach resulted in the loss of roughly 120,000 BTC ($72m). The event would have a wide-ranging impact on the market, depressing bitcoin prices as Bitfinex shut down for more than a week and concerns were raised about basic practices used to secure the digital currency.
Prices were quick to rebound, however, on news of improvements at the exchange.
After reopening, Bitfinex was able to attract significant USD/BTC trading volume, capturing 20% of this market during the week activity resumed. While the exchange’s trading activity started out at a modest pace, reaching 31,000 and 33,000 BTC on 1st and 2nd August, this activity was far lower following the hack.
For the remainder of the month, daily volume failed to reach 10,000 BTC during all but one session. As a result, Bitfinex trading volume averaged only 5,666 BTC per day in August, more than 75% lower than the 24,199 BTC daily volume the exchange averaged during the six months prior, Bitcoinity data reveals.
As analysts described Bitfinex as “the most liquid USD exchange pre-hack”, the event served to make the market even more illiquid, making it vulnerable even to the actions of single trades or traders.
While market sentiment remained bullish in August, it took a hit compared to recent months. Data provided by bitcoin trading platform Whaleclub revealed that during August, 71% of positions were long, compared to 82% in June and 85% in July.
However, it is worth noting that while August’s sentiment fell below that of June and July, it was roughly on par with that of April and May, when the market was 71% and 72% long, respectively, additional Whaleclub figures show.
The hack continued to generate substantial visibility for the month, as analysts voiced concerns about whether Bitfinex would be able to survive. Many drew comparisons to Mt Gox, the Tokyo-based bitcoin exchange that collapsed in 2014.
So far, Bitfinex has been able to avoid a shut down, however, it continues to rebuild its reputation and attempt to reimburse investors.
Those efforts began on 7th August when it decided to generalize the losses associated with the hack across all user accounts, giving investors one Bitfinex token for every $1 lost.
These tokens carried the label BFX and could either be redeemed by Bitfinex or exchanged for equity in iFinex Inc, Bitfinex’s parent company. Market participants also had the option of trading these tokens in a secondary market.
It wouldn’t be until 1st September that the exchange reimbursed accountholders by purchasing more than 1% of outstanding tokens, a move that many analysts viewed as a positive for the market. Bitfinex bought these digital assets for $1 apiece, which was approximately twice their market value at the time.
One month later, analysts provided a mixed reaction to Bitfinex’s approach to the hack, with some supplying criticism and others offering praise.
Arthur Hayes, co-founder and CEO of leveraged bitcoin trading platform BitMEX, voiced the concerns of those unhappy with the exchange’s decision to generalize the loss. Overall, he said, it remains a difficult subject.
“The community is not pleased that the largest USD exchange was hacked and a 36% haircut was imposed,” he told CoinDesk. “The two biggest issues are the lack of transparency on how the haircut was calculated, and the fact that Bitfinex still doesn’t know the attack vector.”
Huobi co-founder Du Jun described the haircut as “very arbitrary and unreasonable”, and others agreed.
Whaleclub’s Petar Zivkovkski portrayed this decision similarly, explaining it as a means by which Bitfinex could transfer risk to its customers by issuing “previously valueless tokens” that could potentially be manipulated by the exchange.
One analyst who offered some praise for Bitfinex’s response to the hack was Kong Gao, overseas marketing manager for bitcoin trader Richfund.
In contrast to others, Gao said that he believes the approach helped the exchange avoid a potential lawsuit and continued shut down.
“We think Bitfinex has made all the right moves to recover from their loss,” he said.
Gao indicated that some Chinese exchange users were exploring a lawsuit against the exchange in Hong Kong prior to its decision to socialize the loss.
Gao also emphasized that while many have cast the generalized loss in a negative light, Bitfinex’s decision to issue tokens has given its customers the opportunity to be stakeholders in the exchange by retaining these digital assets.
Market participants who did not receive these tokens directly from Bitfinex can also become stakeholders by purchasing them on the secondary market, he said.
The comments showcase the belief that by issuing these tokens, Bitfinex might help create greater regulatory certainty by motivating global lawmakers to take a stance on crypto assets with both debt and equity features, a view put forth by Hayes.
The BFX token could also enjoy upside going forward, noted Gao. He emphasized that the token has reached $0.50, and predicted the digital asset could reach between $0.70 and $0.80 “in the short run”.
In spite of this optimistic assessment (and the perception of many that Bitfinex did a good job of handling the hack), the bitcoin community may find overcoming the stigma of the Bitfinex hack to be a struggle.
The digital currency still faces uncertainty surrounding its block capacity challenges, a matter that has been looming for some time.
The “stalemate” between “core developers and miners has left many with a sour taste,” said Zivkovkski.
Bitcoin remains resilient
In spite of these difficulties, market participants should keep in mind that bitcoin has survived many challenges before.
Bitcoin has enjoyed rising adoption over time, as a growing number of companies have expressed they will accept the digital currency as payment. While developers have yet to create long-term solutions to the block capacity dilemma, they have made progress on more short-term solutions.
Chris Burniske, blockchain products lead for investment manager ARK Invest, emphasized that the bitcoin’s blockchain retained its security and functionality in spite of the Bitfinex hack.
“A good analogy is that bitcoin and its blockchain are like a computer’s operating system, while Bitfinex is like a web browser. Just because the web browser gets hacked and taken down doesn’t mean the underlying operating system had associated security vulnerabilities,” he explained.
It is important for the public to understand the difference, Burniske noted, as the security breach could otherwise create a darker cloud that could hamper further adoption of bitcoin.
Crutches image via Shutterstock
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