Cryptocurrency price correction or direct consequences of hacks?
More than $1 billion worth of digital currency has been stolen in just the first six months of this year. This amount isn’t far off of the $1.3 billion in losses from all internet crime throughout 2016, according to the FBI. Cryptocurrency exchanges are the biggest targets.
Another week, another hack, another drop
Since January, we’ve seen crypto exchanges being hacked one after the other… And each hack is usually followed up with a sharp price drop across the crypto market. In January, CoinCheck; February, BitGrail; April, Coinsecure… and the most recent, Coinrail.
On Sunday, June 10, South Korea’s seventh-largest cryptocurrency exchange announced that it was hacked for an estimated theft of US$42 million. Bitcoin fell more than 10 percent to a low of less than $6,500. Moreover, the decline followed a report from The Wall Street Journal that U.S. regulators are investigating the potential price manipulation of BTC at four major cryptocurrency exchanges.
Plunges in the crypto market are generally triggered by malicious activities or events, primarily against centralized exchanges. We usually then observe an extended price correction period of the cryptocurrencies.
The problem is not the bitcoin blockchain itself, which is much more secure than a banking network. The Achilles heel is the how users choose to access the bitcoin and other crypto blockchains.
Centralized exchanges: weak point of the market
There is no doubt that centralized exchanges made cryptocurrencies accessible to a wide audience around the world. But more than 30 cryptocurrency exchange hacks in last 9 years were made against centralized exchanges.
When users buy cryptocurrencies on centralized exchanges, like Kraken or Binance, they are never really in true ownership of their crypto assets. True ownership would mean that upon purchase, their crypto assets would be transferred into a digital wallet with a private key, only accessible by the owner. Instead, the balances are managed off-chain by the exchange and the money deposited is concentrated in the exchange wallets.
In this scheme, users are susceptible to losing access to their assets if the platform goes offline or experiences downtime. And even worse, users could potentially loose all of their funds if the exchange is hacked. This is why most assume the major threat to cryptocurrencies is not volatility, but the fact that 99% of cryptocurrency trades are issued on centralized exchanges.
Most exchanges are simply not designed to provide an adequate level of security when having a large number of assets under management.
Current centralized exchanges do not show the professionalism nor the efficiency of the traditional financial markets and as a result fall into practices like market manipulation and front-running. This lack of transparency is currently fatal for cryptocurrencies and continues to affect thousands of victims around the world. Centralized exchange security shortages, viewed as a quality to “facilitate trade”, excessively disturb the balance of the entire crypto market. This situation, which is increasingly hard to justify, needs a long-term solution to fix flaws in user protection and access to funds.
A Cryptocurrency price correction
As for extreme volatility, it is common for large traders to short cryptocurrencies in order to drive prices down and then buy back at low prices. This kind of “crypto manipulation” is not much different from the present day manipulation of securities, but over time it should stabilize, especially as the market becomes regulated and institutional investors start getting involved in cryptocurrencies on a larger scale.
The lack of trust in the security level of some exchanges can also be attributed to panic-selling. People fear their assets being hacked and in turn sell off their cryptocurrency. Moreover, we can not underestimate the impact of media on the market. Negative media coverage of cryptos ignite more crypto selling, FUD, and the cycle goes on and on…
History shows us that each exchange hack has always resulted in uncontrolled chain reactions. However, can we speak about market correction when the price keeps changing and fluctuating due to market manipulation, massive hacks, media headlines, etc …
Of course, not all centralized exchanges failed but the hack of some of the major ones, coupled with government pressure, catalyzed the emergence of decentralized exchanges.
Decentralized exchanges offer a great alternative to fully centralized exchanges, the main being the ability for traders to gain custody of their own funds and manage them as they please. However, they are not fully scalable and liquid enough for institutional investors. The solution lies in hybrid exchanges, such as the one LGO is currently building.
We posted a great article concerning this topic last week, “The Truth about Decentralized Exchanges” In this article, we discussed the reality of fully decentralized exchanges, evaluating their feasibility in relation to their scalability.
A market transformation more than a correction
Attacks against digital currencies are rapidly becoming part of the ecosystem, and users should stay away from centralized crypto exchanges as these types of attacks will happen again.
This insecurity prevents potential investors from engaging themselves in crypto-currency. Obviously, the market will become reliable once strong security is provided and guaranteed.
Crypto market needs a reliable and long-term alternative to stabilize prices, and not only a correction. At LGO, we have been striving, from day one, to provide a solution that will transform the market for more fairness and transparency.
LGO will bring together the benefits of both decentralized and centralized exchanges in our unique hybrid exchange. We will prevent any type of crypto hack or theft by using multisig wallets and giving our users full control of their funds.
LGO will never be hacked in such way centralized exchanges are currently experiencing. Their weakness is the wallet. This is one of our strengths thanks to a new asset management approach. All of these exchanges are suspected of market manipulation, while LGO’s main goal is to renew confidence in the crypto market, by being demonstrably fair and in compliance with financial standards.
LGO Markets (https://lgo.markets) is a demonstrably fair and premium exchange for institutional investors. It incorporates a decentralized ledger within its proprietary centralized platform in order to guarantee the inalterability, temporality and transparency of the order book and ensure a fair trading environment.