Hacked Exchange Bithumb Totals $180 Million Loss in 2018’s Bear Market

Francisco Memoria

Bithumb, one of South Korea’s largest cryptocurrency exchanges, has reportedly had a net loss of 205.5 billion won, the equivalent of $180 million, in 2018’s bear market. The loss was attributed to hacks to suffered, infrastructure investments, and labor costs.

According to BTCKorea, the company behind Bithumb, the main factor behind 2018’s losses was the year-long bear market the cryptocurrency ecosystem endured, which affected most companies in the sector.

CoinDesk Korea reports the figure is significant, as in 2017 the cryptocurrency exchange had a net profit of 534.9 billion won ($469 million). Despite the different, Bithumb’s revenues grew roughly 17.5% from the equivalent of $292.3 million to $343.4 million.

The trading platform’s operating profit declined by 3.4% to the equivalent of $224.5 million, from $232.5 million in 2017. Its operating expenses nearly doubled when compared to 2017, while its non-operating expenses skyrocketed from the equivalent of $3.6 million to $334.8 million.

Bithumb’s Struggles

Notably, Bithumb has been hacked twice in the last few months. The first time it saw hackers take over $30 million worth of cryptocurrencies from its wallets, in June of last year. The exchange later on claimed to have recovered $14 million worth of the hacked funds.

The second security breach occurred last month, when around $13 million worth of EOS and $6.2 million worth of XRP were taken from its hot wallets. Since the breach, the company has started moving funds to cold storage wallets, and checking its users’ balances.

The South Korean exchange is reportedly planning on cutting its staff by up to 50%, from 310 employees to 150, in order to further cut costs. Despite its poor results Bithumb earned last year the title of largest cryptocurrency exchange, even though it acquired it through “incentivized trading.”

Its trading volumes surged after Singapore-based BK Global Consortium acquired a controlling share in the exchange for $350 million. The firm reportedly implemented a “series of airdrop competitions, raffles, rebates, and other programs” to bring in non-Korean users.

The move led to wash trading allegations based on suspicious activity going on at the exchange, which stopped soon after it made headlines. This activity involved tremendous trading volume on little-known cryptocurrencies, and an odd trading pattern on popular trading pairs.

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Trans-Fee Mining Crypto Exchange 'FCoin' Insolvent After Mistakenly Being Too Generous

One of the first cryptocurrency exchanges to adopt the controversial trans-fee mining (TFM) model, which has been called a “disguised ICO” has paused trading and withdrawals over a shortage of crypto worth up to $130 million.

According to a statement published by FCoin’s founder Zhang Jian, a former Huobi CTO, the exchange is now unable to process withdrawals as its reserves are down by between 7,000 to 13,000 bitcoin, worth over $130 million at press time, over an issue that’s “a little too complicated to be explained in a single sentence.”

Zhang’s statement details the cryptocurrency exchange wasn’t hacked, nor is it pulling an exit scam on its users. He detailed that an internal system error gave users more mining rewards than they should have received, noting the error wasn’t detected for a long period of time.

The transaction-fee mining model, which saw FCoin’s trading volume surpass $5 billion per 24 hours numerous times, sees the cryptocurrency exchange incentivize trading via its own token, FT. FCoin reimbursed users for transaction fees paid in BTC or ETH with FTs until 51% of the coin’s supply was distributed, and redistributed 80% of the BTC and ETH it collected to those holding FT tokens.

The controversial model drew criticism and saw Zhang defend it, claiming it was a misunderstood invention. At the time, he said:

If you look back at history, all new things were not recognized at the beginning. Many were believed to be fraud. Jack Ma was recognized as a fraud when he first promoted the internet in China.

Various cryptocurrency exchanges started adopting the TFM model shortly after, with research showing these platforms had unusually thin order books and low traffic taking into account the trading volumes they had.

According to Zhang, the errors in FCoin’s system gave away too many tokens in mining rewards from mid-2018 to mid-2019, when a complete back-end auditing system was implemented. As throughout 2019 the price of FT kept on dropping, Zhang and his team reportedly used their own funds to buy back tokens and drive up demand, a decision he claims was an error.

This, as it gave users a chance to sell their FT tokens and withdraw as much as possible from their accounts, while FCoin bought up tokens that kept on losing value. Zhang’s announcement came shortly after FCoin suspended its platform over a risk-control issue.

Zhang is now reportedly manually processing users’ withdrawal requests sent via email. The founder of the exchange claimed he will “switch tracks” to start again, and noted he hopes he can use the profits made from new ventures to “compensate everyone for their losses.”

Featured image via Unsplash.