BTC Rally Continues, But Is It Unstoppable?
Anna Carpenter
Thu, 12/03/2020 – 15:17

FRNT Financial

Publication Date

Crypto Story of the Day




Crypto markets are for the most part positive this morning as bitcoin (BTC) hovers around USD 19,000. Spot volumes have declined by about 40% over the last 24 hours.

Crypto Story of the Day

With bitcoin (BTC) threatening a break-out above USD 20,000, we explore some themes that could threaten this rally.

Major Exchange Hacks: The last major crypto exchange hack took place on September 25 when KuCoin suffered a USD 281 million breach. That event didn’t have an identifiable impact on market dynamics. In October we pointed out that exchange stress, which has previously been a decisive factor in price weakness, has lacked impact on the ongoing rally. This is despite BitMEX’s legal challenges, OKEx’s withdrawal issues and the KuCoin hack. Having said that, any exchange hack that could disrupt the current rally would likely have to be record-breaking and crippling to a major venue. 

DeFi Issues/Undiscovered Bugs: Software-related issues that could affect BTC are two-fold: Major DeFi hacks resulting in unwinds of Wrapped Bitcoin (WBTC) positions and the exploitation of undiscovered bugs in the BTC code. The latter, after years of BTC’s code being open source for attack and never being hacked, is considered for the most part impossible in the existing technological paradigm. Outstanding unfixed vulnerabilities have only appeared in the rarest of circumstances, for example, the ‘Inventory Out-of-Memory Denial-of-Service Attack’ vulnerability discovered in 2018 that would have allowed attackers to crash BTC nodes.

A more likely outcome pertains to a DeFi unwind caused by a major hack (USD 120 million has been stolen from DeFi venues this year). Under such a scenario, a rush to exit positions in DeFi would likely cause price dislocations to an untold number of coins. This includes representations of BTC on Ethereum, such as WBTC, with a capitalization of USD 2.3 billion. Overall, USD 2.8 billion worth of BTC is represented on Ethereum by tokens such as HBTC, WBTC, and RenBTC.  

U.S. Regulatory Crackdown: We have pointed to moves against BitMEX and the Department of Justice’s crypto enforcement framework as suggesting authorities are intent on creating pathways to BTC ownership that are in line with their own terms. These terms will likely clash with core BTC value propositions, i.e. self-custody, permissionless, or pseudonymity. Should regulation, as Coinbase CEO Brian Armstrong suggested last week, inhibit the use of wallets with user-controlled private keys, frustrations from U.S. exchanges juggling compliance and serving a customer base drawn to crypto for its libertarian bend could come to a head.

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