On February 21, the cryptocurrency market experienced a black swan event: the Bybit exchange wallet was hacked, resulting in a loss of up to $1.5 billion, setting a new record for the largest security incident. Since the stolen crypto assets were mainly Ethereum and its staking certificates, ETH plunged more than 5% during the day, dragging down the broader market.
Although Bybit, the main party responsible for the security incident, has announced full compensation for user losses, the impact of the theft on the industry and the market is far from over.
First, whether Bybit has sufficient proprietary assets to make up for the asset gap caused by the theft remains an unresolved issue. Taking Binance's asset situation in January as a reference, its $100 billion in client assets corresponded to $8.7 billion in reserves. So Bybit's $15.7 billion in client assets should have a corresponding reserve of $1.37 billion. This means that the pressure to fully compensate client assets is still immense.Currently, whether through internal fund allocation or external financing to fill the funding gap, Bybit needs to audit the exchange's asset status and publicly disclose the results in order to restore market confidence as soon as possible. Otherwise, Bybit may face the risk of a bank run again, which could trigger market panic.
Secondly, the main reason the hackers were able to attack Bybit's wallet was that they gained access to the AWS S3 or CloudFront account/API keys of Safe.Global, allowing them to tamper with the front-end JavaScript files stored in S3 and inject malicious code targeting Bybit's cold wallet addresses. Many professionals believe that this security incident may involve insider collusion. As one of the important multi-signature wallet service providers in the Web3 field, SAFE currently manages over $100 billion in crypto assets, which has caused the market to have huge concerns about the spillover of security risks. In addition, when using an external wallet system, Bybit did not conduct a secondary review of important transactions, and its security awareness was weak, leading to a crisis of trust in decentralized exchanges. Therefore, it may still take a long time to solve the series of problems caused by the theft and rebuild market confidence.
In addition to the outbreak of internal risks, the impact of macroeconomic risks is also one of the important reasons for the continued decline in the crypto market. Against the backdrop of Trump's cuts in fiscal spending and tariff threats, the US stock market has remained volatile, with the median decline of the seven tech giants reaching 13% in the past week. This has made it difficult for the crypto market to continue to enjoy the liquidity spillover from the US stock market. Therefore, as the US stock market plummets, Bitcoin ETFs have also experienced record outflows. Without policy-driven (national Bitcoin reserves) positive news or technological breakthroughs (fundamental improvement), the crypto market will continue to be under pressure from the decline in the US stock market.
However, although the crypto market lacks the driving force for innovation, the valuations of most application-related tokens have fallen below 80% of their historical percentiles, and their prices are still below 90% of their historical percentiles, meaning that the valuations of most projects have returned to the level when Bitcoin was at $15,500. The extremely low valuations have already reflected the sluggish fundamentals in advance. In addition, although the establishment of a national Bitcoin reserve faces huge resistance, Trump has begun to fulfill his campaign promise to "reverse the SEC's crypto regulatory attitude" since last week.
First, in the past week, the US SEC has withdrawn its lawsuit against Coinbase and terminated its investigations into projects such as Robinhood Crypto, OpenSea, Uniswap Labs, and TRON. Uniswap co-founder Hayden Adams responded to the SEC's abandonment of the investigation into Uniswap, saying that the SEC's previous investigation lasted three years, wasting a lot of time and millions of dollars, and had a significant impact on the company. The human, material, and financial pressures that these companies have to bear in litigation are not something that ordinary companies can afford. This means that many small and medium-sized projects will be doomed once they are targeted by the SEC. With the end of the era of brutal regulation, the survival environment of blockchain projects will be greatly improved.
Secondly, President Trump will host the first White House Crypto Summit and deliver a speech on March 7th. The summit will be chaired by White House Crypto Czar David Sachs and managed by Executive Director of the Working Group Bo Hines. At that time, founders, executives, and investors of well-known projects, as well as members of the President's Digital Assets Working Group, will gather together. The goal of the summit is to establish a clear regulatory framework, promote innovation, and protect economic freedom. After the summit, Trump may sign a series of executive orders to promote the development of the crypto market. Although these policy-driven positive news may not be able to reverse the market's downward trend in the short term, the top-level design of crypto regulation and the acceleration of technological innovation will create favorable conditions for the next bull market.
In this round of adjustment, Meme coins are undoubtedly the hardest hit area in terms of valuation. The two most typical representatives, Ai16z and TRUMP, have plummeted 89% and 88% respectively in the past month. This also verifies the past market rule: the growth driven by emotions will ultimately be retaliated by the ebb of emotions. Therefore, the more rapid the rise of Meme coins, the more brutal the fall. It is worth noting that this decline may not be a regular technical adjustment, but a signal of the full retreat of Meme coins, for two main reasons: 1) After TRUMP, Millie's LIBRA and the Central African Republic's CAR have both experienced "death upon exposure", which means that the game of pure capital speculation has become difficult to sustain. 2) The daily protocol fee of Meme coins' largest launch platform this week was only $1.47 million, down 90.4% from the historical peak of $15.38 million. In 2022, the signal of the full retreat of NFTs also started from the 90% plunge in OpenSea's revenue. More importantly, when the hype logic of NFTs was disproved by the market, NFTs have not had a decent rebound from 2022 to the present. In other words, the current investors who are trapped in Meme coins may never have the opportunity to get out.
According to Coinmarketcap data, there are currently 11.29 million crypto tokens listed on the platform, of which 99.2% have a daily trading volume of less than $50 million. And according to data disclosed by Coinbase CEO Brian Armstrong, the market is currently adding up to 1 million new tokens per week. Based on historical experience, when the market's entry threshold continues to decline and the supply of targets continues to increase, capital will usually flow to the top projects, which will also gain higher valuation premiums. The current crypto market's issuance mechanism is even more crazy than the registration system of the Hong Kong and US stock markets, and the trend towards the "Hong Kong-ization" and "US-ization" of the market will be unstoppable. Therefore, in the long run, only by adhering to the fundamentals can long-term asset appreciation be achieved.
In the previous article, we mentioned that this round of decline has evolved from killing valuations to killing logic, marking the arrival of a deep bear market, and the market's sluggishness will last for a relatively long time. However, the most obvious feature of this week's adjustment is that the strong coins have started to catch up, while the low-end ones have started to resist the decline, which means that the embryonic form of a stage bottom has appeared. Of course, the process of bottoming out is also a very long one.Remain patient and wait for the arrival of the new cycle.
In the operation of Altcoins, what type of trading opportunities investors focus on mainly depends on their risk appetite and expected returns. For conservative investors, I believe the platform Bits of the top exchanges still have a certain margin of safety, after all, their current valuations and growth prospects are still quite good. ETH, which has lagged behind in this round of rally, can also be considered, as the unlocking of ETH staking and the launch of hybrid crypto ETFs can bring a lot of incremental demand.
