For the most part, the past 13 months have been like a dream come true for cryptocurrency investors. Last year, the combined market cap of all cryptocurrencies surged by more than 3,300%, and the group has nearly held on to all of those gains through the first month of 2018. By comparison, the S&P 500's monstrous 2017 looks like a flat line next to the march higher in cryptocurrency valuations.
Investors continue to be excited about the potential for blockchain technology, which is the digital, distributed, and decentralized ledger that underpins most cryptocurrencies and is responsible for recording all transactions without the need for a financial intermediary. The thinking behind blockchain's emergence is that it'll help reduce transaction fees since there's no middleman, as well as expedite transaction processing and settling. Since proofing and validation of transaction blocks is always ongoing, blockchain-processed transactions could settle in seconds or minutes, which would be a major improvement over the days it can take for cross-border transactions to fully process.
But beneath the profitable exterior of cryptocurrencies lies a dark secret that enthusiasts have done their best to sweep under the rug. Namely, this largely unregulated and nascent industry is prone to theft and/or corruption from time to time.
Introducing the largest cryptocurrency hack of all time
One week ago, on Jan. 26, CoinTelegraph.com reported that Coincheck, one of Japan's largest cryptocurrency exchanges, became the victim of the largest cryptocurrency hack of all time. According to the report, 523 million NEM coins (known as XEM) were stolen over several unauthorized transactions. These NEM coins had a value of $534 million.
A press release from Coincheck states that the stolen NEM had been stored on a hot wallet (i.e., a wallet connected to the internet), with the hackers somehow gaining access to the private key that allowed them to drain the wallet to a separate account. Coincheck noted its belief that storing NEM on a hot wallet didn't represent low security standards, but it was a bit of a head-scratcher that these coins weren't stored on a more secure multisignature wallet that would have required multiple keys to access the funds.
Following the theft, Coincheck reported the inappropriate movement of funds to Japan's Financial Services Agency and the police. For what it's worth, Coincheck has vowed to get the affected customers their money back, but it remains to be seen how that'll be possible.
A day later, on Jan. 27, the NEM development team announced its intention to have an automated tagging system in place within 24 to 48 hours to track and tag any account that receives the stolen NEM tokens. NEM has already shown exchanges how to check to see if an account has been tagged, which its team believes will help lead to the apprehension of those involved in the theft. Essentially, the thieves appear to be out of options, with no ability to convert the stolen NEM coins to bitcoin, Ethereum, or any other cryptocurrency, and no way to cash out.
Theft and corruption are becoming more commonplace
Unfortunately, what happened to Coincheck is really nothing new when dealing with the unregulated cryptocurrency industry.
Four years ago, the hack at cryptocurrency exchange Mt. Gox, which had been handling around 70% of all bitcoin trading at the time, was the largest. Hackers absconded with around 850,000 bitcoin and tens of millions of dollars at the time, representing more than a $450 million haul. Today, those same bitcoin would be worth about $10 billion. Just months after this breach, Mt. Gox filed for bankruptcy protection.
More recently, in December 2017, crypto-mining marketplace NiceHash reported to The Wall Street Journal that approximately 4,700 bitcoin had been stolen, with a nominal value of around $70 million at the time. The company wound up halting operations for about 24 hours after the coins were taken from a bitcoin wallet.
Another example involves BitConnect, which recently announced that it was shuttering its lending and exchange services as a result of bad press. BitConnect, which had been accused of running a Ponzi scheme on numerous occasions in recent months, allowed users to loan out their cryptocurrency in BCC (the BitConnect coin) in exchange for insanely high returns. We're talking about interest of up to 40% a month with additional daily interest of up to 0.1% or 0.25% depending on the loan amount. It also had a multilevel referral bonus program in place. Of course, bad press, two cease and desist letters, and multiple denial-of-service attacks later, BitConnect shut down its lending and exchange operations, effectively rendering its BCC coin mostly useless.
Long story short, while cryptocurrencies have delivered incredible gains for many folks who've had the wherewithal and stomach to invest in them, they've also demonstrated that their unregulated nature could lead to disappointment in the form of theft or corruption. While these acts of maleficence do only represent a small percentage of crypto transactions, over time they can add up to a much larger percentage. The recent theft of NEM coins might just be the 534 million reasons you need to stay away from digital currencies and focus on more traditional forms of investing, such as stocks.