A $31 million hack freaked cryptocurrency traders out and sent bitcoin’s price plunging

Security issues.
Security issues.
Image: Reuters/Dado Ruvic
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The price of bitcoin plunged by around 6% in the early morning today (Nov. 21) after news broke that nearly $31 million worth of Tether tokens had been hacked and stolen. Tether is a digital token that pitches itself as being a stable cryptocurrency that’s pegged to the dollar, so each Tether token is worth a US dollar.

But Tether developers froze the loot in place before the hackers could cash out. They did this by writing new software that blacklisted the address where the loot was held, and convinced all the exchanges who use Tether to run the new software. This means that the looted funds can’t be moved or liquidated. The move amounted to a hard fork of the Omni Layer protocol, which Tether is built on. For extra safety, Tether says it won’t honor redemptions of any tokens from the stolen funds.

The Tether incident threw the cryptocurrency world into a frenzy. For a long time, questions have circulated around the relationship between Tether and the Bitfinex exchange, and whether Tether’s claims—that it has the $400 million in US dollar reserves to back its tokens—are true.

One dogged critic of Bitfinex and Tether with a large following among traders is an individual who goes by @Bitfinexed on Twitter. Understanding @Bitfinexed’s theory (explained in detail at Alphaville) explains why the market briefly panicked on the Tether hack news. The argument goes like this: Tethers aren’t backed by dollar assets, therefore they can be issued freely. A large Tether supply is then used to buy up bitcoin on Bitfinex, driving up the price. This practice has created the current cryptocurrency boom, and presumably provided ample opportunities for insiders to profit.

If the alleged Tether-Bitfinex house of cards comes crashing down, it could take the cryptocurrency markets with it, since Bitfinex is the largest bitcoin exchange by some distance. Crypto traders have been traumatized by similar crashes before, that have flattened the bitcoin price for years. Most famously this occurred when Mt. Gox—the then dominant bitcoin exchange—collapsed in 2014. That collapse was pre-dated by fund withdrawal troubles, opaque statements from the exchange operator, hacks—and a rapidly rising bitcoin price.

Bitcoin’s price appears to have recovered—it’s almost back to where it was before the Tether news broke. But the tremors from this breach means traders will be closely watching for signs that @Bitfinexed has been right all along. The account’s possibly prophetic pronouncements has already earned it the moniker of “Bitcoin Moses” in the wake of the hack by one industry personage.