Bitcoin price still hasn’t recovered from Bitfinex incident

For better or worse, the bitcoin price couldn’t break away from one of the larger exchanges in August.

In early August, the price of Bitcoin plummeted by 20%, and as the Hong Kong Bitcoin exchange Bitfinex was attacked, the price of Bitcoin showed a waterfall line.

Ultimately, the security incident caused the exchange to lose 120,000 bitcoins ($72 million). The incident had a huge impact on the market, with Bitfinex shutting down for a week, while bitcoin prices took a hit and people expressed concerns about bitcoin's security measures.

When there is positive news coming out about the exchange, the price of Bitcoin quickly rebounds.

After the relaunch, Bitfinex’s USD/BTC trading volume increased, accounting for 20% of the total Bitcoin trading volume during the week. Although the exchange’s trading activity got off to a good start, with 31,000 and 33,000 Bitcoins traded on August 1 and 2, respectively, the trading volume after the hack was still far behind that before.

After this month, the exchange’s daily trading volume never exceeded 10,000 BTC again. In August, Bitfinex’s trading volume averaged 5,666 BTC per day, which was 75% less than the 24,199 BTC per day in the previous six months.

Analysts believe that Bitfinex "was the exchange with the most USD liquidity before the hack," and that this incident has made the market even more illiquid and even harmful to individual transactions or traders.

Although the market remains bullish, this event has had an impact on market prices in recent months. Data from Bitcoin trading platform Whaleclub shows that 71% of positions were long in August, compared to 82% and 85% in June and July, respectively.

According to data from Whaleclub, although market sentiment in August was lower than that in June and July, it was on par with market sentiment in April and May, with 71% and 72% of positions being long, respectively.

Bitfinex survived

As the hack unfolded that month, analysts expressed concerns about whether Bitfinex would survive the attack, with many drawing comparisons to the collapse of Mt. Gox in 2014.

So far, Bitfinex has dodged bankruptcy, but it will need to continue to rebuild its reputation and compensate investors.

The relevant remedial actions began on August 7, when the exchange decided to let users who suffered losses in the hacking incident share the losses. Bitfinex compensated each affected user with BFX tokens, each with a face value of US$1.

The token, called BFX, will be redeemed by Bitfinex and can also be exchanged for equity in the exchange’s parent company, iFinex. Market participants can also choose to trade the token in the secondary market.

On September 1, the exchange bought back more than 1% of BFX tokens, which analysts viewed as a positive sign. Bitfinex bought back BFX at $1 per token, which was twice the market price of the token at the time.

Market response

A month later, analysts have mixed feelings about how Bitfinex handled the hack, with some expressing doubts and others praising it.

Arthur Hayes, CEO and co-founder of Bitcoin leveraged trading platform BitMEX, expressed concern for those who are unhappy with the exchange's flattening policy. He said that overall, it is still a thorny issue.

“The community is not happy with the 36% loss split implemented by the largest bitcoin-to-dollar exchange. The two biggest issues are that there is no transparency in the split calculation and that Bitfinex still doesn’t know what the attack vector is,” he told CoinDesk.

Huobi co-founder Du Jun believes that such a split measure is "very arbitrary and unreasonable", and many people agree with this statement.

Petar Zivkovkski of Whaleclub had a similar take on the decision, saying that Bitfinex shifted risk to its users by issuing a “previously worthless token” that could potentially be manipulated by the exchange.

One analyst who believes Bitfinex’s response to the hack is commendable is Kong Gao, overseas market manager at Richfund.

Contrary to what others have said, Gao believes this approach has allowed the exchange to avoid legal action and collapse.

“I think Bitfinex is doing the right thing in trying to recover from its losses,” he said.

Gao noted that some Chinese users had previously sought legal action against the Hong Kong exchange to challenge its decision to split losses.

New opportunities

Gao also stressed that despite the negative attitude of many people towards amortizing losses, Bitfinex’s issuance of such tokens allows its users to become stakeholders in the exchange by holding such digital assets.

He also said that market participants who did not receive the tokens directly from the exchange could also purchase the tokens on the secondary market and become stakeholders.

The comments demonstrate a belief that by issuing the token, Bitfinex could help generate more regulatory certainty, potentially moving lawmakers closer to the bond and equity characteristics of crypto assets, Hayes said.

Gao said that the BFX token is still on the rise, with the current price of the token rising to $0.5. He also predicted that in the short term, the asset will rise to between $0.7 and $0.8.

Despite all the positive comments (including those that Bitfinex handled the hack well), the bitcoin community may soon find that moving on from the Bitfinex stigma is not easy.

Bitcoin also faces the problem of scalability, which has been an unresolved issue for a long time.

“The tug-of-war between core developers and miners has disgusted many people,” ZivkouKski said.

Bitcoin’s resilience

While the difficulties are numerous, market participants should remember that Bitcoin has come through much greater challenges before.

As time goes by, the popularity of Bitcoin is gradually increasing, and more and more companies have expressed their willingness to accept this digital currency as a means of payment. Although developers have not yet given a clear long-term solution to the block capacity problem, short-term solutions are already underway.

Chris Burniske, blockchain product lead at investment management firm ARK, said that despite the Bitfinex hack, the bitcoin blockchain itself remains secure and its functionality is not affected in any way.

He said: "To use an analogy, Bitcoin and its blockchain are like a computer's operating system, and Bitfinex is like a browser. The browser being hacked does not mean that the underlying operating system has a security vulnerability."

Burniske said public understanding of this aspect is important because security issues could cast a shadow on the popularity of Bitcoin.