If history is any guide, the Binance attack won’t have a lasting impact on the market. That says a lot about bitcoin.
Last Thursday, Binance, the world’s largest crypto exchange, lost $6.3 billion in a cyberattack. Fortunately, the exchange was able to cover the losses, so no users will be harmed. But the hack was startling. In dollar terms, it was the largest cyber theft in history, roughly four times that of the previous record.
Investors always have questions when there is big news in crypto, and this was no exception. The most common question I got last week was: How will this impact the market?
The answer, if history is any guide, is that it won’t. And the reason why says something important about bitcoin.
Hacks Historically Don’t Move the Market
Hacks are scary, but the data is surprisingly clear: Historically, they have not had a significant impact on the crypto market.
Inspired by the work of my former colleague and current Head of Research at Anchorage Digital, David Lawant, I examined the returns of bitcoin in the month following the 10 largest crypto-related hacks in history, including Binance. As the chart below shows, it’s a random walk. In five of the 10 examples, bitcoin ended the month higher than where it began; in the others, it ended down.
Historically, Bitcoin Has Brushed Off Major Hacks
30-Day Performance Following Hacking Incident
Source: Bitwise Asset Management.
Last week fit the pattern. Bitcoin fell about 4% on Friday, but that was roughly in line with risk assets (the Nasdaq-100 fell about 3% on the same day). Bitcoin has mostly drifted sideways since. For the largest hack in history, the market impact is kind of a yawner.
Why Hacks Don’t Matter (Much)
The limited impact hacks have on the market makes sense if you replace the word “bitcoin” with any other asset. Sentences like “the price of gold fell because gold was stolen from a vault” or “the price of Picasso paintings fell because a Picasso was stolen from a museum” sound silly because the thefts don’t change anything about gold or Picassos.
Similarly, attacks like the Binance hack, while unfortunate, do not change anything about bitcoin. There will still only ever be 21 million bitcoin; the bitcoin network still works; it is still held by many of the largest institutions in the world. In bitcoin’s 17-year history, no one has ever stolen bitcoin by hacking the bitcoin blockchain.
Put differently: Bitcoin wasn’t hacked last week. Binance was.
Hacks would impact the market if they suggested there is no safer way to hold bitcoin, but there is. In this case, the stolen crypto was held in online hot wallets at a large, integrated crypto exchange. Investors prioritizing security could have chosen instead to custody separately with institutional custodians whose only business is security, or in personal cold storage solutions, or through ETFs, which have significant layers of protection.¹
Despite the scary headlines, crypto custody is better today than at any point in history. A decade ago, folks were ripping Wi-Fi cards and speakers out of laptops to create air-gapped computers that they stored in bank vaults. Today, we have qualified custodians with SOC 1 and SOC 2 audits and decade-long track records of successfully protecting crypto. It’s not perfect, but it is improving.
As with all industries, crypto faces escalating AI-powered cyberattacks, and exchanges need to be relentless in beefing up their cybersecurity measures. Particularly now, investors should understand the tradeoffs of any custody arrangement and be mindful of the most secure solutions. But the Binance breach doesn’t change the fact that investors have more and better custody options today than ever before.
Which brings me to ETFs.
A Word About ETFs and Custody
One thing I like about ETFs is that they add extra layers of protection for long-term investors.
In the Binance hack, attackers appear to have gained access to an employee’s laptop and used it to drain certain “hot wallets” on the exchange. Hot wallets hold easily accessible crypto that exchanges use to facilitate deposits and withdrawals. They are, by design, the least-protected part of the system.
ETFs that hold crypto assets directly sit at the other end of the spectrum. All ETF assets are held by a qualified custodian in cold storage, meaning wallets that are kept separate from the internet. At Bitwise, no crypto can move from cold storage wallets without actions by multiple individuals, so no single compromised employee or device can trigger a transfer. And any crypto that does move can only be sent to a short list of preapproved addresses belonging to the market makers that are legally allowed to create and redeem shares of the ETF. So even if a cold wallet were compromised somehow, its assets could only be sent to an institutional counterparty, not to a hacker’s wallet.
There are tradeoffs to the protections ETFs provide. Most importantly, the underlying bitcoin only moves once a day. You can trade the ETF all day long, but you can’t pull the bitcoin out and send it somewhere in a hurry. That’s why ETFs are a good solution for long-term investors, not for people who need to move their bitcoin instantly.
For what it’s worth, I expect this sort of split to be the norm. Back when I carried cash, I usually kept some in my wallet. That was risky (my wallet could be stolen or lost), but the tradeoff was convenience. Still, I didn’t keep most of my money in my wallet. Most of it was in the bank, a little harder to access but much more secure. I suspect most crypto investors will end up in the same place: a little in the wallet for convenience, and the rest in a more remote long-term custody solution.
Crypto custody is an evolving space and events like the Binance hack can be scary. But good solutions are available. Crypto will move ahead, as it has in the past.
Note:
(1) It’s worth noting that the majority of Binance’s crypto is held in cold storage, where it’s intentionally slower to move and harder to access. That the hacker focused on hot wallets instead was no accident.
Risks and Important Information
No Advice on Investment; Risk of Loss: Prior to making any investment decision, each investor must undertake its own independent examination and investigation, including the merits and risks involved in an investment, and must base its investment decision—including a determination whether the investment would be a suitable investment for the investor—on such examination and investigation.
Crypto assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but they do not have legal tender status. Crypto assets are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not currently backed nor supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies, stocks, or bonds.
Trading in crypto assets comes with significant risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks and risk of losing principal or all of your investment. In addition, crypto asset markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.
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