Crypto crash commentary: Cold storage is in now

With so many hotspots in cryptocurrency services, crypto gamblers are either trying to trade their virtual sheep for real money or dry them up. Jumping from one burning plank to the next is boring and risky. So Self Custody and its tougher variant OfflineWallet are gaining popularity.




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Daniel AJ Sokolov

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Daniel AJ Sokolov has been writing for heise online since 2002, originally from Vienna. Since 2012, as heise online’s North American correspondent, he has tried to understand Canadians and Americans and make their nature comprehensible.

Instead of leaving the crypto-coins to the next questionable company, they migrate to self-controlled storage, where the owner also manages the matching keys themselves. Bandwidth ranges from your own computer to separate mobile phones and special hardware wallets for printing on paper. Rarely before have so many bitcoins been transferred to self-escrow; Ledger and Trezor, two hardware wallet providers, have never sold this much before.

Behind the deductions from the trading places to the self-controlled warehouse lies the hope that the respective coins will still have a significant value when the ashes from the many fires have settled.

Crypto companies that have become insolvent, such as FTX, are also moving coins still in hot wallets to cold storage. There are other reasons for this: Server operation and the necessary IT security cost money, which is now lacking. Additionally, the hot wallet available for instant transactions makes no sense if nothing is paid out in the next few months anyway. The bankruptcy process will take time.

Both those on various exchanges and lending platforms frozen balance as well as the trend towards offline wallets in the private sector draws liquidity from crypto exchanges and credit platforms. Simply because, depending on the storage medium, it may take more work to bring cryptocoins back into circulation from cold storage, and because self-deposited coins cannot be issued as credit.

This means that the coin carousel does not spin as fast. Lower liquidity makes buying cryptocurrencies even riskier than it already is. The price swings tend to be stronger, especially for currencies that are not so large.

At the same time, the interest rate has been increasing for months. Money is not as cheap as it was last year. Bets placed on credit become more expensive and far riskier. So more and more crypto gamblers break their bets on pump. They sell their crypto coins to pay off the debt.

Guess what: more sell orders mean lower prices, which means even more sales. Etc. (Of course, granting a loan against a deposit of crypto-coins is also a bet, namely on the least stable value of the deposited collateral.)

No one can be surprised anymore by the falling prices. Even the biggest cryptocurrencies, Bitcoin and Ethereum, have lost about a quarter of their value against the euro since the beginning of the month. Falling prices are putting lenders who accept cryptocurrencies as collateral into trouble. The coins deposited as collateral provide less and less security. This in turn triggers price-reducing sell orders, so-called liquidations; the collateral is converted into real money before it is worth even less and falls below the loan value.

In addition, a number of crypto companies have deposited many coins with the crypto exchange FTX for various reasons. These coins are frozen due to the FTX bankruptcy, leaving the crypto companies to sell other coins they still have access to when they need real money. If individual currencies are hit harder, their rates fall even faster, causing even more liquidations of deposited identical coins, and so on. The gap between the issued loans and the missing equivalents widens until the loan platform becomes insolvent. Then it will be liquidated.

Cryptocurrencies remain in high demand in one area: crooks and thieves. Media attention is currently focused on collapsing crypto companies and falling prices. The normal madness in the wonderful world of cryptocurrencies continues. Some examples that have become known in the last eight days:

In Token Flare (not affiliated with Flare Networks) exhausted unknown victims through a mix of an inside race exploit and a blanket pull. In a classic carpet move, the perpetrators created a new cryptocurrency with promises of some kind and convince the victims to buy such coins, and then make off with the deposited money (or other deposited cryptocurrencies). The new cryptocurrency will then exist, but no one will want it anymore because the promises made are not kept.

At Flare, 3.9 billion Flare tokens were deducted and immediately exchanged. Until the theft, the token price was equivalent to an exchange of $71 billion. Because the prize expired immediately, the perpetrators made “only” $17 million.

During the FTX bankruptcy, $600 million worth of coins were said to have been stolen there — $400 million of them by an insider using cold storage. Allegedly, this perpetrator is already knownbecause he paid the transaction fees from a personally registered wallet.

The “Smart” contract of DeFiAI was allegedly hacked. Nothing will be paid out now. The booty is said to be worth $4.17 million. Similar at DFX Finance, someone exploited a flaw in a smart contract and caused five million dollars in damage within a short period of time. It has not yet been decided how things will proceed there.

How great that 94 percent of US state and local pension funds are already betting on cryptocurrencies, and the Canadian province of Ontario’s teacher pension fund has “only” $95 million in FTX. It’s only fitting that Republican politicians want to eliminate risk liability for managers of private pension plans (known as 401(k)) entirely for “investments” in “digital assets.” How much is the world!


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