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As Investors Seek the Next ‘HODL’, Cyber Criminals Are Right Behind Knocking on the Door

July 2023

The value of Bitcoin has risen and fallen significantly over the years. However, despite its unpredictability, it remains an attractive investment that has consistently defied predictions of its demise by restabilising its value.

Bitcoin’s price has been especially volatile since 2020. Its volatility makes Bitcoin a reasonably attractive long-term investment, as investors can wait for the price to fluctuate before trading.

A recent deVere Group report claimed that 82% of millionaires are now seeking advice on Bitcoin investment. These individuals have the liquidity to withstand the conditions of the market and can hold their bitcoin during the ‘crypto winters’. Bitcoin is also seen as a “safe-haven asset” due to the benefits offered by the decentralised fiscal model.

Bitcoin – the highs and lows

Bitcoin has seen a wide fluctuation over the past six years. The value steadily fell from a peak of £14,853 (for 1 BTC) on 17^th December 2017 to its lowest value of around £2,200 on 18^th December 2018. Suggested reasons for this have been regulatory crackdowns in China and South Korea, to a natural regression of a massively overgrown market. The phenomenon was described as the bursting of the “cryptocurrency bubble”.

It then regained ground to just over £7,000 on 31^st January 2020 before dipping down to £3,100 in March 2020, as the world went into lockdown. After recovering to just over £8,000 on 8^th May 2020, the price of 1 Bitcoin was relatively stable until October 2020.

After nearly a year of restrictions, the price exploded to around £41,000 at the beginning of January 2021, before quickly losing half its value to trade at just over £24,000 at the end of January 2021.

While the world recovered from the pandemic, an economic crisis took hold. Having recovered again from its January dip, the value of Bitcoin dropped again in May 2021. Within a week, Bitcoin fell from approximately £40,000 to £28,000 primarily because of market uncertainty. More specific factors in its decline included Tesla’s relationship with Bitcoin and the Chinese government tightening laws on cryptocurrency mining.

In February 2021, Tesla announced that it planned to accept Bitcoin after purchasing $1.5 billion worth of the token. On 24^th March, the company began to accept the currency for the purchase of its products. Yet the scheme was short-lived. On 12^th May 2021, Elon Musk announced in a tweet that Tesla would no longer be accepting the currency, blaming the increased use of fossil fuels for Bitcoin mining. This announcement is believed to have contributed towards the decline of Bitcoin’s value, as investors questioned its wider applications in the future.

In September 2021, Chinese regulators ordered a blanket ban on transactions and mining. Ten agencies, including security, financial, foreign exchange and central bank regulators blamed illegal cryptocurrency activity for the intervention. However, government agencies had also raised concerns that cryptocurrency could disrupt the country’s economic value and could up as a mechanism for capital flight.

However, as investors remained bullish, Bitcoin’s price continued to rise.

Bitcoin experienced a 52-week high of £57,000 in November 2021, as the global economy began to re-open towards the end of the COVID-19 pandemic.

However, after its peak, Bitcoin prices slowly regressed. Bitcoin and other digital currencies experienced what was described as its second ‘crypto winter’ in 2022.

In May 2022, the value of a Bitcoin fell by nearly 70% to £22,000.

As a result of the decline in cryptocurrency value, major exchanges also suffered. Shares of Coinbase fell by 86% from a 52-week high and the company announced it would be cutting 18% of its workforce.

Subsequently, Coinbase and Gemini, another exchange, then announced that they would refrain from hiring new staff in early June 2022.

Market analysts were no longer optimistic about the future of Bitcoin, with few willing to predict a recovery in its value.

FTX kingpin falls – more follow

The decline in Bitcoin’s value ignited turbulence which caused further damage to the cryptocurrency market.

On 9^th November 2022, Binance, a fellow major cryptocurrency exchange, announced it would no longer buy out disgraced cryptocurrency exchange, FTX. In a statement regarding its withdrawal, Binance blamed the decision on findings of regulatory investigations and reports of mishandled funds.

Two days later, FTX filed for bankruptcy and its chief executive, Sam Bankman-Fried, resigned. FTX’s new chief executive, John Jay Ray III, stated in a bankruptcy filing that he had never seen such a failure of corporate control.

Prior to its collapse, FTX was one of the world’s largest cryptocurrency exchanges. However, the bankruptcy filings appeared to reveal that FTX’s software had been utilised to conceal the misuse of customer funds. There were also doubts over the accuracy of the company’s financial statements.

In its statement, Binance maintained that “every time a major player in an industry fails, retail consumers will suffer”. Binance, however, remained confident that the cryptocurrency ecosystem would flourish with entities that abuse the system being weeded out of the market.

In December 2022, Mr Bankman-Fried was charged with 13 offences including fraud, conspiracy, and foreign bribery. He is accused of misappropriating billions of dollars from FTX prior to its collapse.

The mismanagement of FTX appears to have contributed to consumer concerns about the stability of cryptocurrency investments. Overall, the value of a Bitcoin fell by 22% from around £13,450 to just over £10,500.

At the beginning of 2023, Bitcoin’s value began to slowly grow again. The price of the digital token increased by roughly 43% over January, from approximately £13,300 to £19,500. It appeared that Binance’s optimism was well-placed.

However, a knock-on effect had begun. In March 2023, Silvergate the cryptocurrency bank to whom FTX was a client, collapsed.

Following the revelations of FTX’s mismanagement, Silvergate was subject to multiple lawsuits claiming that the bank had knowingly allowed the misappropriation of funds from FTX clients. Some allegations went as far as to name Silvergate as a co-conspirator of FTX.

Concerns over investment in digital currencies began to grow. The price of a Bitcoin subsequently fell by 7% in the wake of the Silvergate crash but recovered within a few days.

Market analysts started to pay attention to the reduction in regulated institutions for cryptocurrency companies. Some feared this could mean even greater risk for investors.

Days later, Silicon Valley Bank (“SVB”) folded. This arguably reinforced the fragility of the regulated financial market for consumers. SVB specialised in finance and banking for venture capital-backed startup companies. It was backed by fiat currency and used a traditional centralised model.

SVB’s collapse was largely related to the economy, rising inflation and interest rates. Start-up clients had needed to draw down on more funds to keep their companies afloat, amid price hikes in rent, equipment, and inflation. SVB’s liquidity deteriorated.

SVB sold all its available-for-sale bonds at a loss of US$1.9 billion. Customers responded by withdrawing their funds, which contributed further to the bank’s lack of liquidity.

On 12^th March 2023, two days after SVB was shuttered, Signature Bank was closed by the New York State Department of Financial Services and the Federal Deposit Insurance Corporation (FDIC). FDIC cited poor management and a lack of understanding of the risks associated with accepting cryptocurrency deposits.

The FDIC also stated that Signature Bank was over-reliant on uninsured deposits which accounted for 90% of its overall deposits for 2022. After the liquidation of SVB, depositors rushed to withdraw their money from Signature Bank, with the bank losing 20% of its total deposits.

The collapse of SVB and Signature Bank has been regarded as one of the greatest financial failings since the global financial crisis in 2008. It has presented a stark reminder of the weaknesses of traditional investment structures.

In response to SVB and Signature Bank collapse, Bitcoin’s value increased by 27% in less than a week. On 10^th March 2023, Bitcoin had a value of nearly £17,000 per coin, by 15^th March this had increased to nearly £21,000.

The resurgence of Bitcoin, after its great losses, demonstrates that it is resilient and is still attractive as an investment. It is steadily becoming more widely accepted amongst investors. The publicity surrounding these events has only highlighted the asset to more interested parties.

Why did Bitcoin re-stabilise?

Whilst the security compared with traditional investments remains in doubt, there are several key benefits that continue to attract investors to Bitcoin and cryptocurrency.

If a company goes into liquidation, there is no guarantee that all investors will receive their money back. Whereas one of the greatest advantages to investing in cryptocurrencies such as Bitcoin, are the things that make it so different to a traditional investment portfolio.

Firstly, Bitcoin is in finite supply, there are only 21 million tokens available. This is believed to have contributed towards its ability to hold a reasonable price even when its value has fallen.

Secondly, and paradoxically, the volatility of its value means that investors can see high returns when the price fluctuates for a short period. Whilst there is an increased risk to investors, there is also a far greater reward than with standard investments.

Thirdly, unlike traditional financial systems which are often subject to government regulation, the decentralised nature of Bitcoin allows for greater privacy. With the development of artificial intelligence and data collection systems, privacy is a growing concern for investors. Blockchains are encrypted using cutting-edge technology that prohibits criminals from gaining access to private details or financial data.

Lastly, macroeconomic factors have also increased the desire of investors to spread their portfolios across multiple avenues to increase security. With examples such as the collapse of SVB, ensuring a broader range of investments has never been more important. This could be why major legacy financial institutions such as JPMorgan, Black Rock and Fidelity have begun offering crypto-related services to their clients.

With every investment opportunity comes a chance for criminals too

Investors in cryptocurrency remain an extremely lucrative target for cybercriminals.

The volatility of the last three years has provided further opportunities for criminals to exploit both investors and weaknesses in the cryptocurrency ecosystem.

Organised criminals are setting up ‘boiler room’ scams, persuading individuals to invest their cryptocurrency in their ‘platforms’, they are using honey traps to obtain passwords and seedphrases from unwitting victims. Casual investors may not know the importance of the specifics around blockchain security.

In 2022, there was a 79% increase in crypto-related crimes. It is believed that illicit addresses received $14 billion between 2021 and 2022.

The allegations against Mr Bankman-Fried, following the liquidation of FTX show that the opportunity for crime is prevalent even in the most regulated aspects of the cryptocurrency ecosystem.

The collapse also resulted in the exchange becoming a target to hackers. On 12^th November, £382 million worth of funds were lost from the firm’s international exchange, and a further £106.5 million was taken from the U.S. exchange. FTX announced that the funds had been lost in “unauthorized third-party transactions” but has yet to identify the offenders. The theft demonstrated the vulnerability of cryptocurrency organisations undergoing liquidation.

According to data from Comparitech, there have been 600 major, recorded cryptocurrency heists to date. From these heists, in total almost $10 billion has been stolen, worth closer to $48 billion at the current prices. There was a notable increase from the 52 reported cases in 2020 to the 136 cases reported in 2021. This further increased to 198 cases reported in 2022. If the numbers continue in this way, then 2023 looks to nearly double 2022’s figures.

The increased interest in decentralized finance (DeFi) has also revealed a significant vulnerability for cybercriminals to exploit. Prior to 2021, the majority of heists committed were targeted at exchanges. However, in 2022, 38% of the cryptocurrency stolen was from DeFi platforms, with only 1% less than from exchanges.

For example, in June 2023, three incidents affecting DeFi projects resulted in losses of £1.5 million. Although a minor loss in comparison to volumes taken from FTX, the attacks showed weaknesses to governance hacks and vulnerability in third-party code.

A governance attack is the result of DeFi protocols offering governance tokens, which provide governance rights to a community of “shareholders”. However, a majority investor can gain access to a greater volume of governance tokens and propose an internal transaction, including smart contracts.

In July 2022, Yam Finance, a DeFi protocol, prevented a governance attack seeking control of a treasury containing almost £2.5 million worth of cryptocurrencies. The attacker attempted to conceal a malicious smart contract within a governance proposal, which would have ceded control of the reserve to them.

On 12^th June 2023, hackers were also able to exploit a vulnerability on the Sturdy Finance lending protocol which resulted in 442 Ethereum tokens being stolen. The tokens were worth approximately £690,000.

However, DeFi projects primarily utilise the Ethereum token, rather than Bitcoin.

Ethereum transactions are classified as “pseudo-anonymous” meaning that they aren’t truly anonymous in nature, but also aren’t easily traceable. To determine the identity of the wallet owner, investigators must conduct complex analytics. They must also consider factors such as social engineering and finding correlations between deposits and withdrawals.

And it is believed that as tracing Bitcoin has improved, victims are now more likely to retrieve funds lost to cyber criminals. This increased ability to trace Bitcoin has resulted in the token becoming a less attractive option to criminals.

For example, the average lifespan of a financial scam involving cryptocurrency fell from 2,369 days in 2020 to 70 days in 2021.

UK law enforcement agencies have been able to seize crypto assets worth more than £300 million between 2016 and 2021.

The development of tracing capacity and a wider understanding of cryptocurrency crime has improved enforcement and reassured investors.

Conclusion

Whilst Bitcoin appears an unstable asset, the last three years have demonstrated its resilience in times of human and economic crisis. The collapse of SVB showed the weakness in traditional investment structures and highlighted the need for individuals to diversify their portfolios to protect their wealth.

Bitcoin is still trading over 50% below its all-time high of £57,000. Whilst is not impossible that Bitcoin can retest this peak, there are many factors the token faces as it regains value. Higher energy prices could impact the ability of cryptocurrency mines to operate, and rising interest rates remain a concern.

Whilst Bitcoin remains a target to cybercriminals, recent advancements in cryptocurrency tracing and recognition of vulnerabilities in the DeFi system show that control can be returned to victims and there are other options for cybercriminals.

Ethereum and other coins are harder to trace and are increasingly being targeted. Partnering with CipherTrace, Quintel is helping reunite investors with lost funds and ensuring appropriate legal action is taken against cybercriminal networks operating globally.