The $1.5 billion Ethereum heist

Note: This was originally published on Feb 23, 2025, in the premium newsletter for paid subscribers

Two days ago, crypto exchange Bybit experienced a hack. The hackers, purported to be the North Korean hacker group named Lazarus, drained the exchange of $1.46 billion worth of Ethereum.

Once the hack became public, Bybit users scrambled to withdraw funds, draining the exchange of an additional $4 billion. There is now talk of "rolling back" the ethereum network to ineffectuate the attack. There's precedent for this. Vitalk Buterin, one of the co-founders of Ethereum, justified a similar move when the Ethereum DAO was attacked back in 2016. That decision sparked off a debate on whether code is law in cyberspace. Community members who believed code is law split off into a classic version of Ethereum, which did not roll back. The market voted with Vitalik, and the chain that rewarded the hackers became obsolete.

In 2016, ethereum was "young" and decision making was easier. The same is true for bitcoin. In 2013, the bitcoin network experienced a hard fork and a single developer and miner sat down to seal the fate of the cryptocurrency. It was undemocratic, totally centralized decision making which tossed aside the rulebook, but it worked and the "purist" fork died off. The rest of the network just went along with it because nobody really cared much about bitcoin in 2013. When the developers wanted to fork again in 2017 - well, that's a totally different story. Roger Ver's book Hijacking Bitcoin: The Hidden History of BTC goes into it.

Rolling back ethereum is not going to be easy to do this time. Given how much time has passed, I doubt it is even feasible. The market agrees - the ETH price is rallying. Investors believe the hack has cut down the "free float" of ethereum. Since ethereum is a platform and transactional currency, the hack is a deflationary event.

Coinbase holds in custody 12.5% of the total crypto market cap. It is a bigger honeypot for hackers than Bybit. What will happen to the crypto space if Coinbase is the next victim?

Coinbase launched the Fairshake Super PAC in December 2023 to support Trump's re-election. Senator Cynthia Lummis, the most ardent supporter of a US government bailout for bitcoin, has ties to Fairshake. Coinbase custodies bitcoin for MicroStrategy and BlackRock's bitcoin ETF. Trump launched his memecoin at the Inaugural Crypto Ball, an event attended by the who's who of the US crypto industry, three days before Inauguration Day.

If there's a Coinbase hack, it will be decided along the lines of the 2023 Silicon Valley Bank bailout. Behind closed doors, and unfairly. See why I exited the crypto space in November 2024 and hold only USDT and Paxgold? In financial markets, there is price risk and price risk only. In crypto, you can never be too safe, and failure can have disastrous consequences.

The current US administration wields too much power over crypto. As the Bybit news shows, the probability of Coinbase getting hacked just went up. This is not a Black Swan (unknown unknown) risk. We can see it coming. In the language of risk, this is a known unknown.

If I had too high an allocation to the crypto space, this is the signal to head for the exit and prioritise return of capital over return on capital. Stay SAFU.

Good Trading! Kashyap

hello@kashyapsriram.com