The Coincheck hack, and vulnerability in centralised cryptocurrency exchanges

A cold wallet takes your digital currency encryption offline, to be physically stored wherever an investor feels comfortable.

The crypto-market suffered its largest hack of all time over the weekend, reminding investors to heed the ‘centralised’ nature of online exchanges. Tokyo exchange Coincheck has confirmed that 58 billion yen equivalent of the alt-coin NEM was lost while most Australians were sleeping off a busy national public holiday. The loss of 523 million NEM protocol tokens (ZEM), worth $425 million USD, broke the record set by the infamous MtGOX collapse of 2014 (a loss pegged at $340 million USD worth of bitcoin). It is not yet known how many customers were affected by the latest cybercrime, which also saw $123 million USD worth of Ripple (XRP) simply disappear.

The 24 hours that followed the digital break-and-enter saw a 16 per cent slide in the price of NEM, and a 9 per cent drop for XRP. By comparison, bitcoin tumbled a mere 5 per cent, and saw a speedy recovery thanks to the present upward trend.

After some fairly humble apologies, Coincheck president Wakata Koichi Yoshihiro and COO Yusuke Otsuka pledged to return 46.3 billion yen to customers, a promise which if kept will be an honourable and ethical Band-Aid response to the problem. However, we must ask the question about how such a security breach was made possible?

Given the level of chatter about cryptocurrency regulation lately (and mistaken impressions of a lack of it), it’s timely to observe that Coincheck is one of Japan’s few unregulated, centralised exchanges. In April 2017 Japan began requiring exchanges to register with the government, however exchanges like Coincheck that began operations before the announcement were allowed to continue to supply services pending government approval. Coincheck’s application was submitted in September 2017, and approval is still pending.

More importantly, the NEM and Ripple funds were stolen from the exchange’s online ‘hot wallet’, teaching a powerful lesson to anyone wishing to invest in crypto.

The idea of having a centralised exchange runs counter to the philosophy of cryptocurrency, which was conceived by Satoshi Nakamoto to function as a P2P (peer-to-peer) distributed network for currency payment and exchange, based on Blockchain technology. The security of a cryptocurrency lies with the fact that the Blockchain network is de-centralised – the complete opposite of a centralised currency exchange.

In order to combat the risk of ‘hot’ wallet-related cybercrime targeting centralised exchanges, cryptocurrency investors can choose to hold their own currency offline, on a physical ‘cold wallet’ like the Ledger Nano S, which can then be stored in a physical safe deposit.

There’s more than peace of mind in knowing that your holdings simply cannot be hacked (read more here) as this latest theft clearly illustrates. It’s no good carrying out a buy-and-hold strategy if hackers can get into the wallet at your chosen exchange. After all, one thing is for sure: if the affected Coincheck customers do get their money back, it will be a profitable day for Ledger resellers.



Bitcoin Trader is a digital currency brokerage firm providing a buy and hold strategy for high volume cryptocurrency investments.

Disclaimer: This content is for informational purposes only. It does not constitute investment or financial advice. Any information, material or commentary is intended to provide general information only. Information contained in this document has been obtained from sources believed to be reliable, but BT Brokerage Services Pty Ltd trading as Bitcoin Trader, makes no representation as to its accuracy or completeness. Before acting on any information contained in this document, each person should consider its appropriateness having regard to their own or their clients’ individual objectives, financial situation and needs. You should obtain independent taxation, financial and legal advice relating to this information and consider it carefully before making any decision or recommendation.

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