It’s a storyline that participants in the cryptocurrency ecosystem have encountered too many times: Bitcoin stolen from users. This time the target was Bitfinex, an exchange among the oldest in the bitcoin ecosystem, an achievement given the number of flops and hacks. The story of the hack is interesting for the dollar amount lost, but also for the manner in which the exchange managed the loss. Bitfinex users will share the loss with a bail-in, taking a “haircut” to spread the losses. Or, another way to express it, socialize the loss. How can a movement that dedicates itself to removing government safety nets and governmental control embrace this ideological mismatch?
The hack on Bitfinex emptied around $72 million worth of cryptocurrency, primarily bitcoin. Though the technical details have yet to be published, this is another blotch on what has been hailed as a transformative technology. Exchanges have served as an effective mechanism for bitcoin users who are seeking ways to capitalize on their assets, and represent some of the few venues where users who possess bitcoin can redeem them for regular currency. This important conduit has had a centralizing effect, exposing a community built on decentralization to significant risk. The Bitfinex losses are further evidence of the risk that bitcoin users assume when participating in the ecosystem, but unlike traditional financial institutions, there is little insurance against disaster.
In the wake of such a disaster, Bitcoiners accepted the first solution offered, and haven’t asked for transparency. This may partly be due to how the Bitfinex hack has been handled relative to other hacks and exit scamers; 36% seems like a bargain for a user base typically exposed to 100% losses. Accepting a haircut seems, in comparison, to be reasonable, but creates a false dichotomy: maintain 0% of your balance or 74%. The standard has been set so low within the bitcoin community, which intentionally lacks any regulatory underpinnings or safety nets, that any retained value above 0% seems good! It is interesting, then, that the community has self-regulated, favoring not their political views, but instead a pragmatic safety net.
Among the fundamental purposes of bitcoin is creating and promoting trustless, transparent forms of exchange. But users have entrusted their assets, and now the investigation and repayment of lost assets, to a central authority that is both completely opaque and unverifiable. What is the total amount of deposits held by Bitfinex? Are audits conducted on reserves to verify their existence? Is this another fractional reserve situation? Why is 36% the loss that users are socializing, and why are all users bearing equal burden? The often over the top libertarian and anarchist crowd that promotes bitcoin as an alternative to the status quo completely capitulated their ideology in the face of financial loss. What gives?
This phenomenon be expressed simply: Virtue untested is no virtue at all, and when tested the bitcoin faithful have failed. Changing the world is a siren call, attracting a crowd that nominally claims to support dramatic change. As I’ve claimed before, and adamantly believe, bitcoin believers can be more accurately described as believers in financial gain through what they perceive to be easy, and accessible means. The Bitfinex haircut should be a reality check for the bitcoin community, and hey, it only cost 36% of your bitcoin….what a steal!