After OKEx suspended withdrawals, how much impact will Huobi and Binance have?

On the morning of October 16, 2020, OKEx, one of the "three major" exchanges in the digital currency field, issued an announcement that shook the industry. In the announcement, the world's leading exchange announced the suspension of withdrawals. Please note that this is not a withdrawal of individual currencies, but a comprehensive suspension of all digital asset withdrawals. Such a situation is rare in the entire industry, so not only OKEx users, but the entire industry is talking about it.

Due to lack of professional knowledge of exchange wallet management, many people did not understand concepts such as private keys when the relevant announcement was released, and even thought that there was a problem with OKEx's own operations. In fact, this reflects the process rules of an exchange's asset management and the balance management of security and flexibility brought about by it. Next, we will conduct an in-depth analysis of this incident from multiple angles.

What is a private key? How to distinguish between cold and hot wallets on an exchange?

Usually, exchanges adopt a "cold and hot separation" digital currency management method. The "hot" here refers to hot wallets. These wallets are always connected to the Internet and are responsible for collecting digital currencies charged by users and providing users with currency withdrawal services. Usually, when a user initiates a currency withdrawal application, the exchange will conduct relevant review work and then withdraw the currency from the hot wallet in batches. For Bitcoin, dozens or even hundreds of user currency withdrawal requests will be completed in one transaction, and daily operations will be carried out efficiently.

However, since hot wallets and online services that serve hot wallets are connected to the Internet for a long time, they also bring security risks and become an important target for hackers to attack exchanges.

Previously, Binance had 7,000 BTC stolen from its hot wallet, but why were not all of Binance’s bitcoins stolen? “Only” 7,000 were stolen? The reason is that exchanges usually store large amounts of digital assets in their cold wallets, which are offline most of the time and difficult for hackers to attack, thus naturally ensuring the security of their assets. For example, the number one address on the current Bitcoin “rich list” is Huobi’s cold wallet, which stores more than 200,000 bitcoins, which is usually a reflection of the exchange’s strength and solvency.

The situation of OKEx at the time was most likely that, based on its internal cold and hot wallet management mechanism and risk control-based authorization mechanism, in the overall or partial digital currency business process, it was necessary to authorize people who held private keys to some wallets, especially cold wallets, and these authorizations could not be carried out normally, so the withdrawal business had to be suspended.

OKEx also revealed the reason in the announcement, that is, the person in charge of the digital currency private key cooperated with the police and could not authorize. People in the industry can naturally guess some clues. For this exchange, who else could have enough information to shut down the exchange's important business? Later news also verified this speculation.

After the withdrawal suspension incident, it seemed that OKEx was "peaceful". Since the coins could not be withdrawn, naturally no one dared to deposit coins. An episode in the middle was that due to a label error by an on-chain data service provider, news of a large amount of Bitcoin transfer on OKEx occurred, which caused an uproar in public opinion for a while, so that OKEx had to clarify many times.

While OKEx is struggling at the center of the vortex, the entire industry is also not at peace. People have turned their attention to the other two of the three major: Huobi and Binance. When OKEx is in trouble, will these two exchanges be okay?

Now, one week has passed since OKEx suspended withdrawals. We will use on-chain data to try to reveal the changes in Bitcoin flows on Huobi and Binance during this period and the truth behind them.

After OKEx suspended withdrawals, the Bitcoin flows of Huobi and Binance changed

In fact, on the day of the incident, we closely monitored the on-chain transactions of Huobi and Binance. At that time, the amount of Bitcoin outflows from the two major exchanges increased rapidly. At the same time, the prices of digital currencies also experienced a short-term general decline. As a leading exchange, such a black swan event had a very obvious impact on the market.

However, this situation only lasted for half a day. The next day, the data of the two major exchanges began to return to normal, and the market quickly got rid of the impact of this incident. For example, mainstream digital currencies such as Bitcoin and Ethereum also returned to the upward trend that had already started at that time. Next, we will reveal this process from the dynamic changes of data on the Bitcoin chain.

First, let’s look at the most direct data, which is the inflow of Bitcoin into the two major exchanges, Huobi and Binance, from one week before the incident to this Friday, which is one week after the incident. The specific dates are October 10 to October 23.

From the perspective of Huobi Exchange, it is clear that the Bitcoin inflow on October 16, Friday, did not cause users to worry too much about charging to Huobi because of the incident at noon that day, and the amount was also at the forefront of the week. After that, the inflow began to decline, but it should be noted that October 17 and 18 were Saturday and Sunday, which belong to the regular and normal inflow decline period of major exchanges . In the following week, the Bitcoin inflow of the exchange obviously entered a rapid upward trajectory, reaching a recent high on the 21st.

Judging from the year-on-year comparison of Huobi’s Bitcoin inflows in the week of the incident and the week after, the year-on-year data declined from Saturday to Monday in the days after the incident, but rebounded quickly thereafter, especially on Wednesday and Thursday.

According to the final data, Huobi Exchange received 41,729.561 BTC between October 10 and October 16, and 45,362.6906 BTC in the following week, an increase of 8.7%.

Here we need to add a background, that is, centralized exchanges have been experiencing a long-term trend of net outflow of Bitcoin, one of the main reasons is the impact of the popularity of Defi, especially the Bitcoin staking business has absorbed a large amount of Bitcoin from exchanges. However, in October, Defi-related tokens plummeted, which also reduced the popularity of this field. At the same time, the prices of mainstream currencies such as Bitcoin and Ethereum rose, and there have been signs of related digital currencies flowing back to exchanges. Judging from the situation in the past two weeks, the black swan event of OKEx suspending withdrawals has caused a certain impact, but it has not affected the direction of this major trend.

Binance's trend is roughly similar. There was no major change on October 16. The decline in the next two days was the aftermath of the incident + the weekend effect, followed by a rebound. One of the major reasons was the price of Bitcoin in the past week.

Year-on-year, it is clear that the big trend has defeated the black swan. With the upward trend of Bitcoin prices, investors are more willing to put Bitcoin on centralized exchanges for efficient trading.

Judging from the outflow of Bitcoin, on October 16, the day of the incident, both major exchanges showed a significant increase, but this trend only lasted for one day. The panic was quickly digested on the following Saturday and Sunday, and the outflow amount quickly fell back.

In the second half of the recent week, the outflows from the two major exchanges rose again rhythmically. The reason is that a new round of Bitcoin market will inevitably lead to an overall amplification of Bitcoin inflows and outflows, which is a normal fluctuation.

At the same time, judging from the situation in the past two weeks, in the face of OKEx's suspension of withdrawals, there was not a very big difference in the performance of users of Huobi and Binance in withdrawing money. Especially with the arrival of the Bitcoin market in the past week, the overall trends of the two exchanges showed a convergence trend. It can be seen that the previous speculation that the incident may trigger large-scale withdrawals from domestic exchanges to foreign exchanges is not valid.

Overall, the background of OKEx's suspension of withdrawals is the general trend of mainstream currencies such as Bitcoin flowing back to exchanges due to the decline of DeFi and the rise of mainstream currencies. At this time, the black swan incident of a large exchange like OKEx did have a certain short-term impact on Huobi and Binance in terms of user deposits and withdrawals, especially on the day of the incident. However, from the data trend, it can be seen that this impact is short-term. A temporary black swan event may have an impact on the market, but in the end, the general trend determines the market direction. The two major exchanges both saw an increase in on-chain transaction volume in the following week.

As for OKEx, which is in the eye of the storm, it has also begun to resume its fiat currency business, and the noise surrounding it is gradually calming down. When it resumes its withdrawal business and the user's reaction after the resumption will be our next focus.

How should users deal with black swan events in the future?

So, how should users deal with similar black swan events? Our suggestions are:

1. It is still preferred to store and trade your digital currency in large exchanges. They have strong solvency, good reputation, proper security measures, and much lower risks of running away and bankruptcy than small and medium-sized exchanges. In fact, the suspension of withdrawals from OKEx also reflects from another perspective that it has relevant internal authority and a series of risk control mechanisms, which can better ensure the safety of user assets, but these mechanisms can also cause embarrassing situations under special circumstances.

2. Pay attention to the decentralized management of assets, that is, "don't put all your eggs in one basket". You can store your digital assets in other large exchanges such as Huobi based on the business characteristics of different exchanges and your daily use needs of related digital assets.

3. For digital assets that will not be traded in the long term, store them in your personal wallet address, but be careful to keep your private key or mnemonic phrase properly, because once lost, you cannot get it back. In comparison, centralized exchanges are safer, after all, your real-name information can be verified, and there is a process to solve it even if you forget your password.

4. Don’t be influenced by the so-called “regional” view of exchanges. In fact, some international exchanges currently do not have compliance licenses in many countries. If extreme incidents occur, users will not be able to seek compensation, let alone find the location, and there is no way to protect their own rights and interests.