This week, Canada’s largest crypto exchange lost more than $150 million in user funds stored in crypto.
The founder and CEO of the exchange, who had sole access to the cold wallets of the exchange, passed away in India. Now, the exchange is not able to obtain access to its crypto cold wallets and fiat holdings.
But, contrary to popular belief, the $90 million loss of QuadrigaCX’s BTC will not have a major impact on the price of Bitcoin.
It’s Not a Big Enough Share of the Bitcoin Supply
Chainalysis, a blockchain analytics firm, revealed in November 2017 that up to 4 million BTC may be lost permanently on the Bitcoin blockchain.
Over the past ten years, many individuals and organizations suffered from hacking attacks, theft, and mismanagement of private keys.
The lack of a central entity in the Bitcoin protocol eliminates the possibility of fund recovery once it is lost on the blockchain.
In the case of QuadrigaCX, $90 million worth of funds stored in Bitcoin were lost. If the private keys are unrecoverable, then the funds cannot be restored.
In comparison to the 4 million BTC that is already out of circulation on the Bitcoin blockchain, which is worth a staggering $14 billion, the $90 million figure is not at all large enough to impact the price of the dominant cryptocurrency.
In 2017, when asked about the effect of the permanent loss of BTC on the asset’s value, Chainalytics senior economist Kim Grauer said that it is difficult to conclusively state that the market cap of BTC is already priced in and reflects the 4 million BTC that cannot be restored.
“That is a very complex question. On the one hand, direct calculations about market cap do not take lost coins into consideration. Considering how highly speculative this field is, those market cap calculations may make it into economic models of the market that impact spending activity. Yet the market has adapted to the actual demand and supply available – just look at exchange behavior. Furthermore, it is well known monetary policy procedure to lower or increase fiat reserves to impact exchange rates. So the answer is yes and no.”
The Problem Needs to be Addressed
Bitcoin is divisible down to eight decimal places and as such, even if only 16 to 17 million in BTC out of the fixed supply of 21 million is in circulation, the supply isn’t an issue.
However, it could become a serious problem if the supply of BTC continues to drop in the long run, affected by cases like QuadrigaCX.
Throughout the past two years, primarily due to the growing demand from governments including the U.S., Japan, and South Korea for high-standard internal management and security systems, major crypto exchanges have significantly improved their infrastructures.
Most recently, Gemini, a leading U.S.-based crypto exchange, became the first digital asset trading platform in the world to complete a SOC 2® — SOC for Service Organizations Type 1 examination with Deloitte.
“This makes Gemini the world’s first cryptocurrency exchange and custodian to demonstrate this level of security compliance in protecting customer data and funds,” Gemini head of risk Yusuf Hussain said.
Many of the largest cryptocurrency exchanges in the global market have become increasingly focused on security and investor protection. Throughout the long-term, exchanges in the digital asset sector have to prevent similar issues from arising to ensure the prosperity of Bitcoin.
Featured Photo by CMDR Shane on Unsplash