Japanese Cryptocurrency Exchange, Coincheck, Hacked for over $500m (USD)
Early today, Japanese Cryptocurrency Exchange, Coincheck, halted withdrawals and sales of most cryptocurrencies. Sites like Coin Telegraph and Fortune began reporting on a suspension in withdrawal and that a large amount of cryptocurrencies had been withdrawn from its wallet.
It is becoming increasingly clear that the exchange has been hacked (see here and here).
But more importantly, why does hacking should result in a fall in the price of cryptocurrencies?
That's a legitimate question because "assets" have just changed hands. It is unlikely that prices are falling in expectation of a large sudden sale of cryptocurrencies, because these hackers are likely smart enough to sell them slowly over time when the prices are high in order not to crash the market.
To understand this issue, we have to consider that cryptocurrencies role as a pioneering innovation that does not have mass adoption yet.
Much of the recent large increase in price has been justified by expectations of mass adoption years down the road, and the hacking damages that.
Ask yourself this: 120 years ago, when the car was invented, and you had the option to buy a Model T. If reports began surfacing of 10% of vehicles exploding, would you buy it?
The case for cryptocurrencies is even worse because security is of utmost importance. The general public will be likely to take up cryptocurrencies more slowly due to bad publicity from events such as hackings.
But the hacking means little in the long-run.
Exchanges will step up security measures (or bad exchanges with bad exchanges will all eventually get hacked and we are left only with good ones). And the potential of cryptocurrencies will depend on them confronting the issues that are already here - transaction costs and speed, stability of value.
This is also why regulation may not be that bad of a thing.
Efforts to reduce money laundering and illicit usage of cryptocurrencies, and governments stepping in to ensure that exchanges meet what we already expect them to have - high security, good KYC procedures - will only aid widespread adoption and increase the long-run potential of cryptocurrencies in the future.
