A Year in Cryptocurrency and Blockchain: Q1 2018
It is perhaps no secret that the cryptocurrency market failed to meet the expectations of most investors this year. While 2017 was widely regarded to be the year cryptocurrencies and ICOs reached mainstream popularity, 2018 has been impactful in a much more subdued manner. For instance, institutional interest and adoption of cryptocurrency and blockchain-related services have never been higher, as has regulatory acceptance of the technology.
Apart from that, here are some developments in the cryptocurrency industry that defined the first quarter of 2018.
Cryptocurrency Market Pull Back
Bitcoin breached the $20,000 price point for the first time on 17 December 2017, marking a significant milestone for the cryptocurrency market as a whole. However, as the New Year approached, cryptocurrency prices began to show signs of pullback, with bitcoin hovering around $14,000. Over the next month, it lost around 65 percent of its value, with no respite in sight.
By the end of the first quarter, the market lost a cumulative $342 billion, the most significant loss in cryptocurrency history.
In a rather vague blog post published January 26, 2018, Japanese exchange Coincheck announced that it would be suspending all NEM deposits and withdrawals due to security concerns. While details were initially sparse, rumors quickly began to hint that the exchange had suffered a major hack. Fueling this speculation was the fact that Coincheck eventually ceased almost all trading activity on the platform and disabled fiat and cryptocurrency withdrawals indefinitely.
The true scale of the security breach, however, turned out to be significantly worse than anyone had predicted. According to the company, an unidentified third-party had stolen around $500 million in NEM tokens from the exchange.
The Singapore-based NEM Foundation, meanwhile, claimed that the hack did not take place because of security vulnerabilities in the token’s protocol. It was later discovered that Coincheck stored customer funds in hot wallets for convenience, which were easily exploited by hackers. Nevertheless, NEM’s developers worked with Coincheck to tag the stolen cryptocurrency and prevent its circulation or liquidation at other cryptocurrency exchanges.
The $500 million figure made Coincheck’s hack the most significant instance of cryptocurrency theft ever recorded. It even managed to surpass Mt. Gox hack in this regard, an infamous Japanese exchange that lost $480 million worth of bitcoin in 2014.
Departure of BitConnect
On January 17, 2018, cryptocurrency investment platform BitConnect abruptly announced that it would be ceasing operations effective immediately and refunding any outstanding loans. The statement read, “We are closing the lending operation immediately with the release of all outstanding loans. With the release of your entire active loan in the lending wallet we are transferring all your lending wallet balance to your BitConnect wallet balance at 363.62 USD.”
Shortly after the announcement, BitConnect’s cryptocurrency token BCC lost over 96 percent of its valuation. While the token was used to facilitate lending on the platform, it served no purpose once BitConnect announced its immediate shutdown. Notably, BitConnect boasted a multi-million dollar market cap only two weeks prior, $2.7 million at its peak. Today, the token’s valuation has hit the literal rock bottom.
BitConnect was long criticized for resembling a Ponzi scheme, especially as it promised guaranteed, risk-free gains on any amount of investment. On January 4, 2018, BitConnect was served with an emergency cease order by The Securities Commissioner of the State of Texas.
Early 2018 also saw the adoption of Segregated Witness, a Bitcoin-exclusive feature introduced in August 2017 that promised to lower fees by dynamically allowing more transactions to be added in each block. Until March 2018, most exchanges and cryptocurrency did not offer SegWit-enabled addresses for bitcoin deposits or withdrawals. Many believe that the surging bitcoin transaction fees observed in late 2017 could have been avoided to a significant degree if the feature had been adopted immediately after included in the Bitcoin protocol.
Most cryptocurrency exchanges also slashed bitcoin withdrawal fees after adopting SegWit. While Bitfinex was the first to reduce its fee by 25 percent, Binance took it a notch higher with a 50 percent reduction. Smaller exchanges like Nanex went as far as dropping the fee by 75 percent.
For the uninitiated, SegWit increases the space available for transactions in a bitcoin block by removing signature data from each transaction. Today, approximately 40 to 45 percent of all transactions are SegWit-compliant, a massive leap forward from 15 percent at the start of the year.
Nano and BitGrail
Feeless cryptocurrency Nano was caught in the midst of controversy in February 2018, when BitGrail exchange declared insolvency after somehow losing $150 million worth of NANO. Unlike other high profile cryptocurrency hacks, however, many believed that BitGrail founder Francesco Firano was involved in the theft.
The Nano development team authored a blog post to dispel ongoing rumors that a flaw in the blockchain or software had resulted in the loss. They wrote, “From our preliminary investigation, no double spending was detected on the ledger, and we have no reason to believe the loss was due to an issue in the Nano protocol. The problems appear to be related to BitGrail’s software. We did not know of BitGrail’s insolvency before February 8, 2018.”
After much back and forth, it became increasingly clear that any amount of Nano held on BitGrail was permanently and irrevocably lost. In June 2018, however, Firano tweeted that all leftover funds were seized “following the legal actions promoted by Espen Enger.”
After the tremendous success of initial coin offerings throughout 2017, it became clear that malicious actors would attempt to exploit the speculatory nature of the cryptocurrency market. While the United States Securities and Exchange Commission (SEC) has stepped in on more than one occasion to put an end to fraudulent token sales, scams quickly began proliferating on social media websites through paid advertisements and sponsored posts.
On January 30, 2018, Facebook published a blog post in which it said that advertisers would no longer be able to promote “financial products and services frequently associated with misleading or deceptive promotional practices.” The company said that the policy was intentionally broad to stem the flow of fraudulent advertisements on the platform.
“We want people to continue to discover and learn about new products and services through Facebook ads without fear of scams or deception. That said, there are many companies who are advertising binary options, ICOs and cryptocurrencies that are not currently operating in good faith.”
Following Facebook’s footsteps, Google, Twitter, and Snapchat also announced similar advertising restrictions for cryptocurrencies and token sale investments. Notably, however, the ban was somewhat relaxed halfway through the year, on June 26, 2018.
While the hacks and security breaches in January painted a grim picture for the cryptocurrency industry, the start of the year was also a point of maturity for the entire market. Price speculation started to fade given declining prices and development of blockchain platforms continued stronger than ever. In the next part of this series, we will explore what defined the cryptocurrency sector in the second quarter of 2018