Despite bitcoin’s resilient decentralized network, could a mere exchange hack actually spell the end of bitcoin as we know it?
There’s been a lot of debate surrounding this question in recent weeks due to this image getting shared around:
What you’re seeing is a flowchart demonstrating just how much BTC that Coinbase has under its own custody. With 2,275,123 BTC in Coinbase’s hands – nearly 11% of the total supply, and 11.5% of the circulating supply – it certainly begs the question: Will Coinbase kill bitcoin?
To understand the gravity of what we’re looking at, let’s first get an understanding of previous Bitcoin honeypots and what happened to bitcoin following their unraveling.
Previous Bitcoin Exchange Hacks
While there are plenty of dangers to leaving bitcoin on an exchange, historic exchange hacks have actually done little to “kill” bitcoin.
- Mt. Gox hack: One of the most notorious hacks in bitcoin’s history, the Mt. Gox hack of 2011 was essentially the first major wake up call to teach bitcoiners “not your keys, not your coins”. A security breach led to an eventual loss of 850,000 BTC, as revealed years later after its 2014 bankruptcy filing. At the time of the hack, 6.7 million BTC were circulating, meaning that 4% of the total supply, and nearly 13% of the circulating supply had gone missing.
- Bitfinex hack: In August 2016, Bitfinex, one of the major exchanges of the time, experienced a security breach that resulted in 119,754 BTC vanishing from the platform. At the time, this sum represented slightly less than 1% of the circulating supply. But despite how much smaller of a hack this was compared to Mt. Gox, that didn’t stop the Bitcoin price to plunge by more than 20% following the news.
Although these historic hacks ruffled the feathers of Bitcoin holders, observing the price action that followed these hacks just goes to show the strength of the Bitcoin network. No matter the circumstances, huge losses of bitcoin do little to suppress the network over the long run.
So could an attack on Coinbase change things?
How Large Is Coinbase By Comparison?
As mentioned, the Mt. Gox honeypot jeopardized almost 13% of circulating bitcoin at the time. The Bitcoin network hasn’t since had to deal with any stress tests nearly as large as Mt. Gox, but the 11.5% of circulating supply held under Coinbase management should ring the alarm bells for bitcoiners around the world.
At the time, that 13% held by Mt. Gox represented $27,000,000 in potential sell pressure on a $672,000,000 asset. If that supply were to hit the market all at once, the huge influx of new supply coupled with relatively low liquidity at the time could have easily and instantly slashed the BTC price by more than 50%. What happened in reality, however, was arguably worse: The uncertainty of the Mt. Gox hack nixed bitcoin’s historic first bull run, leading to a cascade of sell pressure over five months, collapsing bitcoin’s price by more than 93%.
By comparison, Coinbase currently sits on 11.5% of the circulating supply, wrapped up in the centralized exchange (CEX) itself, exchange traded funds (ETFs), custodians, funds and over-the-counter (OTC) dealers, companies, as well as miners.
Let’s break down these numbers:
- CEX: 1,105,318 BTC make up the bitcoin held by the everyday people who have yet to move their funds to cold storage.
- ETFs: 808,619 BTC make up the balance sheets of companies, 401ks, pension funds, and investment accounts of people all throughout the United States, managed by major asset managers like BlackRock, Grayscale, Ark, and the rest.
- Custodians: 137,947 BTC are sitting in Coinbase vaults.
- Funds/OTC: 106,541 BTC make up the bitcoin used to facilitate Coinbase’s OTC exchanges.
- Companies: 99,091 BTC belonging to major corporations like MicroStrategy, Tesla, and SpaceX.
- Miners: 17,609 BTC belonging to miners with Coinbase partnerships, like CleanSpark, Cipher Mining, and Bitfarms.
Is Coinbase A Threat To Bitcoin?
The short answer is yes. Coinbase poses a real threat to the Bitcoin price that could dismantle a lot of confidence in the network if someone were to hack all of its custodians at once and dump the bitcoin onto the open market. During the second week of March in 2020, the mere panic of the coronavirus pandemic tanked bitcoin by more than 50% in just two days – no hacks involved.
Such an attack would have much larger ripple effects than either of the aforementioned like Mt. Gox or Bitfinex. At the time of those attacks, neither exchange was nearly as intertwined with the mainstream financial system as Coinbase is. Today, however, there are publicly-traded companies and trillion-dollar asset managers relying on Coinbase for custodianship. It’s not just niche tech enthusiasts and early adopters losing out on their bitcoin – it’s grandparents, college-aged citizens trying to outrun inflation, and small business owners that would get hit the hardest by a Coinbase hack.
Potential Dangers Of A Coinbase Hack
If history were to repeat in a similar fashion to Mt. Gox or Bitfinex, Bitcoin could easily experience a 50%, 60%, or 70%+ drawdown in no time at all. Coupled with a potential global crisis that places stress on Coinbase, leading to the hack, and that percentage drop could go even higher.
On top of the price collapse, the market-wide realization that no entity is too large to fail – even one that’s in bed with governments, mainstream corporations, and the largest asset managers in the world – would likely initiate a wave of harsh regulations to crack down on bitcoin. It’s the perfect storm in the eyes of authoritarians to leverage catastrophe and spin it into a “need” for a “savior” to “protect” investors. Custodial restrictions, invasive financial surveillance, and outright forks of the network itself would all be on the table.
In a similar fashion to a prominent shitcoin’s notorious hard fork following a 2016 DAO hack, BlackRock or some other entity could propose a hard fork in the Bitcoin chain to reverse previously-made transactions that would enable them to recoup the lost funds. With the major political influence that these entities have, along with the millions of people who would have lost money in the hack, they could certainly muster a lot of momentum behind the fork.
Despite all of this, however, there is no way to know whether such actions would kill the real bitcoin itself. If history suggests anything, it’s that bitcoin has an uncanny ability to absorb attacks and recover like no other asset. How many assets do you know of that have gone through more than four consecutive 70-90% drawdowns, only to breach new all-time highs within two years?
Would A Coinbase Hack Kill Bitcoin?
While Coinbase certainly poses a great threat to bitcoin in the short term, a major Coinbase hack that saw 11.5% of the supply dumped onto the market would only affect the Bitcoin price, but not the security of bitcoin itself. If anyone wanted to kill bitcoin as we know it, it would require a change in the actual code of the protocol that compromises its internal security.
A hard fork scenario like the one suggested above could start another “civil war” within bitcoin, much like the Blocksize war that resulted in entirely new Bitcoin forks like Bcash (BCH) back in 2017. But this time around, with backers like the United States government and BlackRock behind it, they may have more power to sway the actions of the public in their favor and bring over the masses to their own hard fork.
Again, however, history has proved bitcoin’s ability to remain resilient throughout these civil wars. BCH and BSV alike are down ~98% against bitcoin since launching. So there is no data to suggest that the real BTC would lose to yet another off-shoot chain, even if governed by the embedded political and financial giants of the US.
How Would Bitcoiners Respond?
True bitcoiners understand that any hard forks to the original Bitcoin protocol are fraudulent attempts to capture the network. Governments and all others in power understand the unique position bitcoin is in to oust them from their financial supremacy, so they are incentivized to fight against bitcoin however they think possible.
The first major tactic we’ve seen them employ to capture bitcoin is through the array of spot ETFs launched for the public. They figure that with enough of the supply under their control, they can gain outsized influence over the network. But bitcoin was created precisely to end that function of our current flawed monetary system. Instead of gaining influence through stake, bitcoin enforces proof of work, which balances the playing field so that no matter how much bitcoin you own, your voice has no more say than the humble stacker sitting on 0.01 BTC or even less. Miners pushing out quintillions of hashes per second bulletproof the network from outside attacks. If governments want to control bitcoin, they’ll quickly realize that it’s much more cost efficient for them to join along and play by the rules, rather than try to change it for themselves.
I’m afraid that many won’t be able to put the pride in their own currency aside, however, and the fighting will continue until they financially destroy themselves in the process.
As a bitcoiner, respond to the fight by staying true to the real Bitcoin network. Don’t sacrifice your slice of the most freedom-enabling protocol on the planet for convenience and acceptance by society. A society built upon broken money is not one you want to be a part of in the end. Contribute to the future by educating others and being a pioneer for the new world that bitcoin offers.
Final Thoughts
It’s important to realize that there are real bad actors out there who are directly incentivized to kill bitcoin. World leaders with all their wealth and power tied up in local currencies see the “threat” that bitcoin presents, not only to their currency, but to their own power and control over the population.
What’s also important to realize is that bitcoin is not the actual “threat” to authoritarians and their currencies. Their own actions threaten themselves; Bitcoin is just the escape vessel to avoid the monetary debasement that results from their greed. It’s a fundamental flaw plaguing all fiat currencies today: With no backing, infinite ability to print more, and thus virtually zero ties to reality or the laws of physics, hyperinflation is the inevitable outcome of the money that society uses today. Just look at the performance of any currency against gold over the long term to see what I mean. Coupled with a position of power and a direct incentive to enrich themselves by sitting on a basket of scarce assets, and you have a recipe for financial disaster waiting to happen.
Coinbase’s Bitcoin stockpile puts themselves in a very dangerous position. They are a prime target for other bad actors to break in and steal from. Given that it’s a centralized institution, they must expend infinite energy over time updating and staying on top of vulnerabilities, and there is no full guarantee that they can prevent a hack in the long run as cyber criminality becomes more and more advanced.
The only guarantee to own the money we have comes from taking self custody of bitcoin. By storing your bitcoin in your own cold storage device, you not only know where exactly your money is, but also that it will never end up somewhere else against your will.
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