Last weekend, the small South Korean cryptocurrency exchange CoinRail confirmed to the public via Tweet that it had been hacked. On their website, CoinRail elaborated that 70% of the coins/token reserves were moved offline to a cold wallet for safe storage.

CoinRail said that of the 30% of coins which were leaked, around 80% had been “frozen/withdrawn/redeemed or equivalent”, with an investigation by law enforcemeny, developers, and other exchanges all participating.

The price of Bitcoin (BTC) dropped 10% to a two-month low, to under $6,700 on Sunday. On Monday, four major mainstream news outlets did some digging and discovered that the CoinRail attack resulted in a loss of $42 million, simultaneously dropping the value of all cryptocurrencies. If you want to read some more FUD, check out the articles on Bloomberg, Wall Street Journal, Reuters, and The Guardian.

Here’s Bloomberg’s chart of the sudden drop that coincided with the CoinRail news:

Is it right to put all the blame on the hack for the crashing markets? Bitcoin was worth $19,343 on it’s December 16th peak, and at the time of writing this it is selling for $6,797.04. That is about two-thirds from the highs reached.

How could a small South Korean exchange have such a large impact? There is no easy answer to that question. Bitcoin’s value was on the decline leading up to the CoinRail hack. After reaching highs of nearly $20,000 four months prior, Bitcoin had its worst quarter ever, losing $119 billion in value. Whenever Bitcoin’s price changes, all of the other cryptocurrencies follow suit, with Ethereum and Ripple both nosediving: Ethereum sunk 47.7%, while Ripple dropped 77%.

Because the price of cryptocurrency fluctuates wildly on even a good day, is it plausible that CoinRail caused the most recent dip? Smartereum suggested otherwise, pointing at new regulations.

There are two sides to the coin when it comes to regulation. On one side, government regulation could help stabilize and further legitimize Bitcoin, especially in the short term. The regulations imposed by China and South Korea, with China’s ban on ICO’s, which they deemed to be a risky financial instrument used by startups to raise funding.
Value likewise dropped in South Korea when the country forced traders to identify themselves.

Maybe regulations will help to calm down rampant speculation in the long term, but in the near term, it helps to turn the value charts into rollercoasters.

Perhaps the real story isn’t “hack of an exchange makes Bitcoin value tumble.” Perhaps, as Naked Security’s Mark Stockley suggests, the on-going story is that wild swings in value are just one of the ways you can lose your shirt with Bitcoin. The other is through the all-too-frequent occurrence of simple daylight robbery.

For all their impenetrable cryptography, cryptocurrencies are often exchanged and stored on less than impenetrable websites – also known as “exchanges.”

Just because Bitcoin is resistant to hacking doesn’t mean its resistance gets transferred to the exchanges. The exchanges weren’t made by Bitcoin founder Satoshi Nakamoto after all, they were made by the same people who make all the other websites in the world.

As we’ve said before, exchanges are Bitcoin’s soft, vulnerable underbelly.

Want to upload your private keys to an exchange to make trading easier? That puts your keys at the mercy of that site’s security, which is an entirely unknown quantity. Websites can be hacked, and keys can be stolen. And don’t count on the US Federal Deposit Insurance Corporation (FDIC) to protect your assets: the exchanges aren’t backed by any governments or central banks.

Besides that, exchanges are run by people who may or may not be trustworthy, and may not be regulated. They could be crooks, incompetent or brilliantly clever.

They might even be as clever as Satoshi, but how much coinage are you willing to bet they are?


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