🖨️ Tether Proves Reserves? ☠️ Bithumb Hacked — Cryptos for the Rest of Us

Rainy days in Hong Kong matching the mood of the markets which have remained depressed since last week.

As a reference price, I’ve been using a market-cap-weighted index of the top 10 cryptos to measure the performance of the entire market. I’ll start putting it here for a weekly reference of price performance too if there’s continued interest. The index is set at 100 from the 1st of December 2017 and rebalanced quarterly. It’s the same reference we use over at Node Capital.

Node Index: 67.93 / -1.05% on the week
BTC: 6,600 / -0.89% on the week

🖨️ Tether Proves Reserves?

What’s the Story?

Tether has released a surprise report from a law firm showing that they have enough dollar reserves to back the cryptocurrency. Tether is a cryptocurrency that is pegged at 1:1 to the USD.

It is designed to allow investors to trade USD pairs, or simply cash out of cryptocurrencies without having to make the expensive crypto/fiat conversion.

As a result, it is one of the most traded cryptos in the market. It currently is number 11 by market capitalisation.

Supposedly Tether maintains its 1:1 peg by ‘printing’ new tethers every time demand surges. They hold an equivalent amount of USD in their bank account that backs the newly minted tethers.

Why Should I Care?

Toward the end of last year, rumours began circulating that Tether was printing their cryptocurrency without the USD backing and using it to buy Bitcoin. Allegedly this created inflation and artificially propped up the price of Bitcoin.

These suspicions gained traction when the Panama Papers leak indicated a connection between Bitfinex and Tether. Bitfinex is a cryptocurrency exchange and the first to start widely trading Tethers.

The theory is that whenever Bitfinex wanted to generate more trading volume, they would print hundreds of millions of Tethers and use it to purchase Bitcoin. The ensuing price rally would sucker in more people into the market, allowing them to dump their BTC at higher prices while benefiting from increased trading volumes.

Bitfinex’ed has been a loud critic of Bitfinex and it’s Tether ties. There’s even a Twitter account that tracks the number of Tethers printed.

This conspiracy appears to have legs. There is a clear correlation between Tether prints and a rise in the price of Bitcoin. If the conspiracy is true, then at least a portion of the rise in Bitcoin’s price was fuelled by fabricated demand.

However, it’s entirely plausible that every time there is a demand for Bitcoin, there is an equivalent demand for Tethers.

After all, most people entering the market are still entering from fiat. If the exchanges receive USD, they will often hold this in equivalent USDT (Tether).

Is this Conclusive?

The report was produced by a law firm Freeh, Sporkin & Sullivan. For what it’s worth, one of the partners is a former FBI director.

The firm inspected the bank balances and confirm that on June 1 there were USD2.54 billion in Tether’s bank accounts. Coinmarketcap shows Tether’s market cap was 2,504,850,000 on June 1.

Critics have quickly pointed out that this is not an audit. The firm could be saddled with liabilities that mean the true value of the firm is much lower than the bank balanced imply.

Tether has been criticised for not having a third party audit them. They claim that none of the major audit firms is willing to put their name to a cryptocurrency audit.

Either way, this proves, to a degree, that the Tethers are backed by the equivalent in USD cash. Whether Tether as an organisation is an on-going concern is subject to a full audit.

☠️ Bithumb Hacked

What’s the Story?

Bithumb was hacked and USD30 million worth of coins have been stolen. Bithumb is South Korea’s largest cryptocurrency exchange.

In response, the exchange has moved all user assets into cold storage. They will also cover client losses with their own funds.

How did this Happen?

There aren’t many details yet. It appears Bithumb were aware of the security vulnerability. They were in the process of upgrading their IT infrastructure when this hack happened.

Recently, the number of unauthorized access attempts has increased. As such, an urgent server checkup was conducted to strengthen the security of all system.

It appears Ripple was stolen. It’s not clear if other tokens were compromised. It’s also not clear how many users were affected.

There has been speculation that this vulnerability came from phishing emails.

What does this mean?

The market dropped ~3% following news of the hack. The impact seems minimal though. The amount is small, relative to the size of Bithumb.

Consider Coincheck in Japan were hacked for over 10 times this amount and still managed to pay users back.

This hack comes two weeks after Coinrail, another South Korean exchange, was hacked for USD40 million.

It’s been reported that Bithumb is spending about USD9 million on security alone. They also follow the government’s guidelines on having a certain percentage of staff being information security specialists.

This goes to show that we’re still in the infancy of cryptocurrency security. Governments, exchanges, and individuals all have a lot of learning to do before best practices are established.

For the average investor, this means practising basic safety measures. If you can handle the complexity, cold storage is a great way to keep your assets safe.

Otherwise, diversifying assets across top exchanges is also a decent protective measure. This may go against standard advice, but the top exchanges are in a good position to;

a) weather losses across client accounts

b) reimburse clients

c) build the best protective measures against hackers

While they’re easily the biggest targets, they’re certainly not the easiest. We’ve not had a hack that’s brought down a major exchange (yet). Even if such an incident did occur, if you’re diversified across multiple top exchanges you can cap your maximum downside to the exposure on any given exchange.

Of course, this assumes you’re prepared to lose that amount for any given incident. If you’re not, then rolling your own cold storage solution is clearly better. Paper wallets, Trezors, and Ledgers are all good options.

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