By Parke Shall
The price of Bitcoin fell significantly last night, at one point dipping to $480 per Bitcoin. The cause of the coin sell-off was news that broke that a major Hong Kong exchange, Bitfinex, was hacked to the tune of 119,000 Bitcoin (between $65-$75M BTC).
This appears to be the second largest meaningful hack involving Bitcoin, after the Mt. Gox exchange hack that occurred in 2014.
Bitcoin plunged after one of the largest exchanges halted trading because hackers stole about $65 million of the digital currency.
Bitcoin slumped 5.5 percent against the dollar as of 2:30 p.m. on Wednesday in Tokyo, bringing its two-day drop to 13 percent. Prices also sank 6.2 percent on Monday, although it was not clear if that initial move was related to the hack.
Hong Kong-based exchange Bitfinex said Tuesday it halted trading, withdrawals and deposits after discovering the security breach. The exchange said it was still investigating details and cooperating with law enforcement, but acknowledged some bitcoins were stolen from its users.
While this is definitely a step in the wrong direction for the digital currency that we are long, we look at this as a buying opportunity. We added Bitcoin last night near $500, and we will look to add today as capital becomes available to allocate.
In this article we want to share a couple of the reasons that we think this is a buying opportunity and why this occurrence does not rattle our confidence when it comes to Bitcoin going forward.
We saw a situation similar to this in 2014 when the Mt. Gox exchange was hacked, only to a much larger degree. The hack shocked the price of Bitcoin but the currency eventually recovered to move back to two year high prices that it was at earlier this year over $700. From Bloomberg,
The price drop was reminiscent of the market reaction after Tokyo-based Mt. Gox -- then the largest bitcoin exchange in the world -- disclosed it was hacked in February 2014 and filed for bankruptcy weeks later. Bitcoin prices plunged 30 percent that month.
This hack did not deter Bitcoin in 2014 and it certainly didn't deter Chinese investors from piling into the digital currency earlier this year when looking to move out of their local currency.
Bitcoin's decentralized appeal and person-to-person mechanics continue to give it an appeal for certain transactions that we believe will transcend any small blips on the radar like this recent hack.
With a digital currency, obviously the most detrimental piece of news that can come out can be a hack. But it is not a hack of the currency, per se. It is a hack of an exchange that houses the currency. These hacks have nothing to do with the fundamental mechanics of how Bitcoin works, rather they have to do with exchanges used for trading Bitcoin that don't have security in place to prevent these measures.
These hacks are not a testament to the currency being unsecure, they are quite the opposite as a matter fact. The mechanics of Bitcoin are that it is extremely secure and it moves from person-to-person. The blockchain is supposed to give us full clarity into all Bitcoin that moves anywhere at any given time.
It is only when we introduce the human element of exchanges and the related security that is necessary for them that stealing Bitcoin becomes a real problem. It's very similar to the dollar. If someone breaks into a bank vault and steals $50 million, it doesn't mean that the system of currency is unsecure, it means the means in which it was housed was.
Given this, we began to buy a little Bitcoin yesterday. Truth be told, we have expected another hack and have outlined this as a potential risk factor in many of the articles we have written about Bitcoin.
Another large looming risk factor is that Bitcoin is reliant upon the infrastructure we have in place in order to function. The second risk factor we can't avoid too much, but the first one we can avoid by diversifying our Bitcoin portfolio and holding Bitcoin through numerous exchanges and numerous wallets in order to give us some safety in case a hack like this negatively affects an exchange that we work with.
Much like the Mt. Gox hack, we expect Bitcoin to be resilient over the course of the long term. Once the public has a better understanding of how the currency works, we expect that people will come to the realization that these hacks are not a sign that Bitcoin is unsecure in and of itself, but rather that some of the human element introduced to the way it is handled has been able to be manipulated.
We are long Bitcoin and continue to believe the prices will appreciate meaningfully over the next few years. We are buying the dip.
Disclosure: I am/we are long BITCOIN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.