Bitcoin and Cryptocurrency Prices Recover After Coincheck Hack

It is a sign of the growing maturity of the cryptocurrency ecosystem that even the largest theft of coins in its history failed to crash markets. The overall market capitalization for cryptocurrencies dipped briefly to $507.9 billion, a drop of 9% from its high 4 hours earlier, last Friday morning as news of a hack on Japan’s Coincheck exchange spread through the markets. (See also: Coincheck May Have Suffered The Worst Hack In Cryptocurrency History.) 

But it has recovered since and almost touched the $600 billion mark Monday morning. At 14:44 UTC on January 29, the cryptocurrency market was valued at $573.4 billion. 

NEM, the digital currency affected by the hack, was trading at $0.96, down 6.44% from its price 24 hours ago. The coin is down by 7.69% since the start of this year. It remains to be seen whether markets have fully absorbed the hack’s shock or if there might be a delayed reaction to it later. For example, news of Mt. Gox’s bankruptcy filing in 2014 sent bitcoin into a prolonged swoon for the rest of that year. 

As of this writing, however, the cryptocurrency was mostly trading sideways. Bitcoin's price was $11,189.58, a drop of 4.32% from 24 hours ago.

Ripple, which has seen some of the biggest declines among the top 10 most-traded cryptocurrencies this year, was up by 4% after a positive news report on Coindesk highlighted CEO Brad Garlinghouse’s remarks about the use of XRP at a conference. Apart from NEO, other cryptocurrencies were mostly in the red this morning.

Coincheck’s Prompt Response and Lapses  

One reason why cryptocurrency markets have recovered quickly is due to Coincheck’s prompt response. The exchange has promised to partially reimburse users affected by the hack. The 260,000 users affected by the hack will be reimbursed at a rate of $0.82 per coin. That’s still less than NEM’s trading price currently, but it is a start.

As details emerge about the hack, Coincheck’s lapses are being highlighted. There were two. The exchange did not implement NEM’s multi-signature feature, which requires multiple sign-offs before funds are released. It also did not keep customer funds in cold storage, disconnected from the Internet.

Does The Hack Mean We Need More Regulation? 

Observers say the hack will lead to more government regulation of cryptocurrency exchanges. For example, David Moskowitz, founder of Indorse Pte., told Bloomberg that one of the immediate effects of the hack will be more regulation by authorities over exchanges. In Japan, the Financial Services Authority (FSA) rapped Coincheck and ordered it to submit a report about its security operations by February 13. It will also investigate security measures at other exchanges. 

Government regulation is a mixed blessing for cryptocurrencies. On the one hand, it is necessary to safeguard ordinary investors and establish rules into a largely unregulated terrain. But it will also introduce bureaucracy and dilute the libertarian ethos of less government that gave birth to virtual currencies. 

A Lesson From South Korea?

While governments around the world get their act together regarding cryptocurrencies, exchanges could learn from the South Korea Blockchain Association’s efforts at self-regulation. Fourteen bitcoin exchanges came together in December 2017 to announce self-regulatory measures. Included in these measures are keeping 70% of the exchange’s crypto holdings in cold storage and allowing only one registered crypto trading account per user.

The association also imposed capital requirements of 2 billion won ($1.83 million) on the exchanges and made it mandatory for them to have internal processes similar to that of a standard financial services provider for their operations.

Those measures have led to confidence and more liquidity in crypto markets there. According to news reports, the National Pension Fund there has invested 2.6 billion won in four cryptocurrency exchanges through two venture capital funds. A major e-commerce operator in South Korea also announced that it would begin accepting 12 cryptocurrencies. 

Reduced Bitcoin Transaction Fees 

Bitcoin’s transaction fees, which have been the subject of numerous reports recently, are coming down. From a high of $55.29 in December, the average transaction fees for using bitcoin has come down to $8.29, as of this writing. The cryptocurrency’s high fees are typically blamed for its lack of traction in daily transactions. More traction will help reduce price volatility for bitcoin due to news cycles and threat of government regulation. 

The decline in transaction fees has paralleled a similar decline in number of transactions (and a drop in trading volume involving bitcoin) occurring on its bitcoin network. Some are attributing it to the implementation of SegWit2X on more nodes within bitcoin’s network. (See also: What Is SegWit2x?)  

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns small amounts of bitcoin.

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