Weekly Market Report - 11th May 2019
This weekly report aims to provide an overview of the crypto markets focusing on secondary market trading. Though nothing here is investment advice, we hope this provides some useful and targeted information.
Weekly Market Report - 11th May 2019
Crypto exchange hacks have always been a major concern in the crypto community as millions of dollars are lost in each incident. In this week’s report, we compare the security levels between the top exchanges and discuss how users can protect their assets when accessing crypto exchanges!
Market Overview
We are focusing our market overview on the top 100 tokens from CoinMarketCap and the sector classification is roughly in line with what MyToken uses with some minor modifications. We will be continuously updating the sectors and their constituents as we develop a deeper understanding of the crypto ecosystem.
This week’s new participants in the top 100 coins:
ABT, ETP, R, RLC, JCT, SAN, NET
Coins that dropped out of the top 100 coins compared with last week:
XZC, LOOM, LRC, HC, ODE, ELA, NULS
Rolling Returns of Top 100 Tokens by Sector
Returns of the top 100 Tokens by sector from April 9th, 2019, to May 10th, 2019
Returns vs Volatility
This is a look at the mean and total daily returns vs volatility for the 15 sectors as well as the overall crypto and equity market. Some sectors only contain one or two coins/tokens while others have more than a dozen.
Mean Daily Return vs Volatility from April 9th, 2019, to May 10th, 2019
We abbreviated the names of several sectors to make it easier to view:
M = Market
DC = Digital Cash
CP/MP = Computing Power/Mining Pool
A/M = Advertising/Media
G/E = Gaming/Entertainment
C = Classics
D/GT = Dividend/Governance Token
E/T = Exchange Token
OC/I = Off Chain/Interoperability
Correlation Between Daily Returns of Each Sector
Correlation between daily returns of each sector from Feb 9th, 2019, to May 10th, 2019. Correlation ranges between -1 and 1. A correlation close to 1 or -1 means a very positive or negative relationship between the two subjects, respectively. A correlation close to 0 means no linear relationship between the two subjects.
The above figure shows the correlation between the daily returns of each sector. The correlation is similar to what we have observed last week, in which the computer power/mining pool sector shows the weakest correlation with the rest of the crypto market beside stablecoins.
Focus Spotlight — Crypto Exchange Security
On the early morning of May 8th, 2019, the crypto market was shocked by the announcement from Binance, stating that a “large scale security breach” has occurred and that a total of 7000 BTC had been stolen. This amount was roughly equal to $41 million at the time of writing. Although the exact method has not been concluded, the hackers most likely used a combination of virus deployments and phishing techniques to obtain users’ API keys, 2FA codes and other info.
In response to the incident, Binance decided to use its Secure Asset Fund for Users (SAFU fund) to cover the loss, ensuring that users will not be affected by the hack. Following the announcement, the price of Binance Coin (BNB) dropped by nearly 10% from $21.84 to a low of $19.88. However, BNB was soon able to recover back to its $21 level.
Hacking in the cryptocurrency ecosystem is not a rare thing. After the first hacking incident in 2011 with Mt Gox, dozens of similar incidents have occurred since then. In the year 2018 alone, a total of $1.3 billion had been stolen due to vulnerabilities in crypto exchanges’ infrastructure. As of now, most exchanges have implemented security measures to avoid these incidents.
In the following, we compare the security level between some of the largest exchanges and discuss how users can protect their assets when trading crypto.
According to cybersecurity rating service Crypto Exchange Ranks (CER), an exchange’s security level can be evaluated based on server security, user security, and crowdsourced security. Although the scoring methodology is not provided in detail, CER lists the elements associated with each category. For those familiar with the technical aspects of cybersecurity, server security involves elements such as SSL/TLS certificate, WAF&CDN, SPF, DNSSEC, open ports, hidden dirs and dirs access, secure headers, cookies, and existence in spam DB. User security, on the other hand, is evaluated based on account security features including captcha, two-factor authentication as well as the password requirement for account creation. Finally, crowdsourced security refers to whether or not the exchange has an active bug bounty that is self-hosted or on a bug bounty platform. The rankings are as follows:
As shown above, although Binance has a high score in user security, its server security is not the strongest among the top exchanges. In contrast, Bifinex has the highest scores in both server and user security. The exchange has not reported any incidents of hacks since 2016.
Earlier this year, ICO Rating also released a report providing ratings to more than 100 crypto exchanges. The report evaluated exchange based on user account security, registrar and domain, web security and protection against denial-of-service attacks. A letter score was also assigned to each exchange based on these four criteria.
Similar to the ranking from CER, Kraken and Bitifinex are among the top exchanges that receive the highest ratings. On the other hand, exchange such as Binance, OKEx, and Houbi still have areas of improvement with their web/server security.
The two reports provide an overview of the security level for these top exchanges. However, another important aspect to consider is the exchange’s contingency plan for hacks and security breaches. Currently, Coinabase’s crypto hot wallet is insured by Lloyd’s syndicate while its USD wallet is insured by the Federal Deposit Insurance Corporation (FDIC). Binance, as we have previously mentioned, has its own emergency fund in which 10% of the trading fee received is allocated to this insurance fund. Unfortunately, for the remaining exchanges, no details have been provided with regards to how users are compensated when hacking occurs.
For crypto traders, in addition to selecting the right exchange, further steps should be taken to ensure the security of crypto accounts. For starters, choosing a difficult and lengthy password and using a different password on each exchange is the first step. Most crypto exchanges offer two-factor-authorization, where users are required to submit a one-time-password (OTP) before logging in, making any transfers or changing login passwords. This OTP can be sent via SMS, email or with the Google Authenticator App. Due to frequent email hacking and SIM-swap frauds, in which hackers gain access to users’ SMS, it is recommended that users pair their accounts with the Google Authenticator App.
Even with 2FA set up, users still often fall victim to phishing attacks. This is one of the possible techniques used in the recent Binance hack. In a phishing attack, instead of gaining access to users’ emails or mobile phone, a fake site is set up to masquerade as the exchange’s official website. The link to this site is usually sent to users via email. Unsuspecting users that enter their login credentials and OTP passwords on the fake site immediately give away their accounts as the hacker simultaneously logs in to the real exchange. To prevent this from happening, users are encouraged to always manually and accurately type in the website’s url when accessing these exchanges. An alternative way is to set up a bookmark to the exchange’s official site in advance.
As of today, the crypto market still lacks regulation and the government has minimal control over it. It is nearly impossible to recover stolen funds after they are withdrawn from an exchange. Furthermore, very few exchanges like Binance are willing to fully compensate for users’ losses when accounts are hacked. We hope that users remain cautious and make use of these exchanges’ security features when trading crypto.
Thank you for reading this week’s report! Please leave a comment below to share your thoughts and ideas on crypto trading!
Data Source
We included data from sources such as CoinMarketCap for analyzing price movements, volatility, mean daily return, and correlations between each sector; MyToken for sector breakdown; CER and ICO Rating for crypto exchange security ratings.
Stay Tuned Here
KRONOS is a leading quantitative research firm based in Taipei, Shanghai and Beijing. We’re bringing new asset management strategies to the crypto world by leveraging our combined decades of experience trading in global traditional markets.
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