Hedge Fund Manager Brian Kelly Explains November 14th’s ‘Crypto Market Meltdown’

Siamak Masnavi

On Wednesday (14 November 2018), Brian Kelly, the founder and CEO of digital asset investment firm BKCM LLC, explained yesterday's "Crypto Market Meltdown", which led to double-digit percentage losses for most of the major cryptocurrencies including Bitcoin, which sank to $5,569, its lowest price in over a year.

Yesterday, Kelly, on CNBC's "Fast Money" show, was asked by host Melissa Lee to explain the reasons for the crypto markets going into "meltdown mode."

Kelly started by pointing out that Bitcoin Cash (BCH) was about to a "hard fork", i.e. an update to the protocol software "such that the software validating according to the old rules will see the blocks produced according to the new rules as invalid," which means that "all nodes meant to work in accordance with the new rules need to upgrade their software." And if "one group of nodes continues to use the old software while the other nodes use the new software, a split can occur."

"Now, when you do a software upgrade, everybody usually agrees, but in this particular case, everybody is not agreeing about what that software upgrade should be. So, we've got ourselves a Crypto Civil War... and that has people in the market concerned.

So, what happened today? People are concerned that both Bitcoin and Bitcoin Cash networks might slow down, they might not work as well, that software upgrade might not go through, or if it does go through, we'll end up with some chaos.

People started selling. That triggered stops. Everybody got concerned. And that's what happened today."

However, Kelly himself was not worried:

"In my view, very short term type of event. I think it's probably an opportunity. In fact, we did some buying at my fund today."

Lee then asked guest Meltem Demirors, the Chief Strategy Officer at CoinShares, if "there was a catalyst to the upside" after this "short-term selling event." She answered:

"Absolutely... We had six months of Bitcoin and a lot of other assets trading sideways, and I think there were just a number of events that piled up that led to this mass release, the sell-off... My view is that it's probably some institutions, some funds, deleveraging, taking some money off the table. Any time there are forks, things tend to trade weird and strange. So, I think people are trying to take some risk off the table. There are a number of exciting events coming up. In December, ICE's new subsidiary, Bakkt, is going to launch... And then, in January, we'll see Fidelity new crypto custody arm starting to operate."

According to data from CryptoCompare, BTC is currently trading at $5,637 (down 1.81% in the past 24-hour period) and BCH is trading at $444.89 (down 8.74% in the past 24-hour period).

The Bitcoin Cash hard fork is scheduled to take place on November 15th 2018 around 16:40 UTC.

Featured Image Credit: Photo via Pexels.com

CZ Explains How Binance Dealt With Aftermath of $40 Million Theft

On Sunday (May 19), Changpeng Zhao (aka "CZ"), the Co-Founder and CEO of digital asset exchange Binance, told the crypto community what he and his team had been up to since the May 7 security breach that resulted in a theft of over 7,000 BTC from their Bitcoin hot wallet. 

What Happened on May 7?

According to CZ, the hackers involved in the security breach somehow managed to get control over a number of user accounts and structured large withdrawals from these accounts in such a way thay managed not to be detected/noticed by Binance's "pre-withdrawal risk management checks." Their "post-withdrawal risk monitoring system" only noticed something was wrong after the hackers had moved the stolen BTC off of the exchange via a single transaction, at which time it immediately suspended all "subsequent withdrawals." 

At first, the Binance team was not exactly sure what had happened, and so they decided that the safest course of action was for CZ to send out a tweet to say that the "withdrawal servers" were in "unscheduled maintenance mode" while the team was investigating the incident. 

Communication With the Crypto Community

Once the team had confirmed that the exchange had been hacked, information about the security incident was broadcast to the outside world via all of Binance's communication channels (such as Telegram, Twitter, and Medium). 

Since the team could not be sure which user accounts the hackers had access to, it was decided that it would be too risky to allow further withdrawals to be made until the team had the chance to make "significant changes" to the platform (to make it more secure). Binance's announcement on May 8 estimated that the exchange needed to do "a thorough security review" and estimated that this would take about "ONE WEEK," and that during this period, "deposits and withdrawals" would need to "REMAIN SUSPENDED."

By being fully transparent in their communication with Binance users, they were able to receive "tremendous support" from them.

CZ's Periscope AMA Session on May 8

Seeing CZ live put much of the Binance community "at ease." Unfortunately, because CZ had been up all night, he was not in an ideal mental state when he did the AMA. Just before the AMA, his team told him that a Bitcoin Core developer had suggested that it would be technically possible to roll back the single Bitcoin transaction carried out by the hackers by "hugely incentivizing the miners." CZ made the unfortunate mistake of mentioning this "reorg" idea (which he now realizes is a "taboo topic") during the AMA, for which he took a heavy beating (especially from hardcore Bitcoin maximalists) on Twitter (and elsewhere). 

CZ's Mental State Right After Being Told About the Bitcoin Theft

Although he was in a "F***, F***, F***” state" for around 10 seconds, a few moments later, he "began to come to terms with it," and a quick mental calculation told him that the theft of around 7000 BTC (equivalent of around $40 million at the time) could be fully covered by their SAFU fund. Meanwhile, his team had already gone into "War Mode", and their professionalism and support cheered up CZ. 

Support From the Crypto Community

Binance received support from many sources: people defending him and Binance on social media platforms, and helping to answer questions; the Binance Angels (who are all volunteers) "addressing questions" and "reassuring" users on "multiple communities"; analytics firms helping with the tracking of the stolen funds; exchanges and wallet services offering to help by blocking "any deposits associated with the hacker addresses"; and "numerous offers for help from law enforcement agencies around the world."

A Blessing in Disguise?

"Speaking with various team members, and as correctly analyzed by community members, such as Gautam Chhugani, this incident may actually be a good thing for us in the long run. Security is a never-ending practice. There are always more things to do in security, and we have implemented many of them in this last week and will continue to implement more in the future. Given this incident, Binance has actually become far more secure than before, not just in the affected areas, but as a whole."