Imagine that you have invested a considerable amount in Sony, the Japanese international conglomerate. All is well except one day, for example, on November 24, 2014, the company announces a massive internal data breach.
In that data are conversations from senior executives and all kinds of employees who, to put it simply, don’t paint a good picture of the company’s operations. Naturally, this causes fear among investors and a fall in the price of Sony’s stock. While a 10% drop may not seem like a big deal in the context of the crypto markets, when it comes to major indices like Japan’s Nikkei 225, it’s breaking news.
Although the situation was very bad, there is nothing wrong with the graph above. The company was struggling and its stock price underperformed other companies in the Nikkei 225 index. Business as usual.
However, when we take a look at a similar situation involving a large company in the crypto sphere, the consequences of a large-scale hack may surprise you and me.
A recent blog post by Gavin Andresen, the former main Bitcoin developer, shows it all. Towards the end of 2019, IOTA, which currently sits 24th on CoinMarketCap, suffered a major breach, now known as the “Trinity Wallet Attack Incident”.
Thanks to a vulnerability in Trinity, a wallet managed by the IOTA Foundation, a hacker managed to compromise more than 50 IOTA seeds (a seed from the IOTA ecosystem is used to generate addresses). On February 11, the hacker began stealing the funds from the compromised seeds. The breach resulted in a loss of approximately $ 2 million in IOTA tokens.
On February 12, the IOTA Foundation decided to close the coordinator. The IOTA Network Coordinator is a node that approves IOTA currency transactions. With its shutdown, all of the IOTA cryptocurrency came to a halt in an attempt to prevent more funds from being stolen. It took a little less than a month for the network to restart the coordinator on March 10, 2020.
Gavin put it very well:
“I like to think that technology is important and that better technology tends to win in the long run. I still mostly believe it, but I have to admit that seeing a cryptocurrency not fulfilling its most basic function for a whole month [bold comes from original quote] and the markets ignore it, I wonder what people think when speculating in cryptocurrencies. No one probably thinks, and they are traders and bots every day.
Given that the situation was dire, any rational person would expect a full-scale dump that would mark IOTA’s historic performance for life, making it easily identifiable against another digital asset for the same time period. But, let’s see if you’re good at mind games and can guess which one is IOTA from the following two charts:
No, it’s not the second. The second is Ethereum. The first is IOTA. You’d expect this big hollow to be some sort of delayed reaction to the aforementioned massive hack, but no. It’s just an occasional Ethereum dump.
In his blog post, Andresen makes a comparison between IOTA and Zcash, as the two charts look virtually identical, even though Zcash didn’t experience any issues between February 12 and March 10. about technology (again?) ”, ‘again?’ obviously being the key word.
While it’s not always true that a major breach doesn’t materially affect a cryptocurrency’s market capitalization, that’s not the point. In a mature market, this should not happen at all, especially when basic functions like trade confirmation are put on hold for an extended period.
The good news is that things have improved significantly, albeit thanks to the bear market following the burst of the last bubble. But, in terms of representing the real value generated by blockchain companies, the crypto market still has a long way to go.