Why bitcoin made a comeback after the South Korean exchange hack

Key Points
  • Bitcoin declined on Wednesday after a South Korean exchange hack was reported.
  • But by the same evening, the digital coin had bounced back.
  • Two cryptocurrency traders explain why.
Litecoin founder says despite bithumb hack, cryptos will stage a comeback
Litecoin founder says despite bithumb hack, cryptos will stage a comeback

Bitcoin made a comeback despite crashing after a recent hack on a South Korean exchange, and two cryptocurrency traders explained why it rebounded.

Charlie Lee, the founder of Litecoin, a global decentralized currency that is based on blockchain technology, said it was to be expected.

"Whenever there's an exchange hack, people get scared and the price drops," Lee said on "Fast Money" Wednesday. "It happens all the time."

"Whenever there's some bad news like an exchange hack, the prices drop like 5 percent," he said. "Five percent is a lot in the stock market world, but it's like nothing in the crypto space."

Bitcoin, the largest digital coin by market cap, fell from $6,718.35 to $6,561.79 Wednesday after news that the South Korean cryptocurrency exchange Bithumb was hacked and $30 million of coins were stolen.

By Wednesday evening at 5:30 p.m. ET, bitcoin had rebounded to more $6,700 in what Kelly called a "mini uptrend."

The two traders explain why.

1. Bithumb acted quickly

Kelly said as soon as the news was reported the exchange took action.

"They halted withdrawals and they put everything into cold storage," he said.

2. Exchange paid back investor losses

Bithumb used its own money to pay back investors.

"They immediately said, 'Any losses, we have reserves. We're going to pay for them. Nobody loses money," Kelly said.

3. Fundamentals

Lee said when an exchange is hacked, it doesn't affect the fundamentals of the underlying coins.

He likened it to a bank robbery. If a bank gets broken into and gold is stolen, Lee said, it doesn't affect the price of gold.

"So same with bitcoin," he said. "If an exchange doesn't protect their coins well enough and it gets hacked, it doesn't really change the fundamentals of the coin that they're protecting."

Additionally, a report released on Wednesday, by a Washington law firm, stated that the cryptocurrency firm Tether has enough U.S. dollar reserves to back its digital coins. The report came on the heels of investor concerns that the firm may not have actually had the reserves to back up its coins.

"The past few years people have been scared that Tether has been printing their Tether coins out of thin air and buying bitcoin with it, which might be the cause of last year's run up," Lee said. "And if they actually do have the USD backing that means that the run-up is created by real demand and not fake demand. That's really good news."

Investors have to protect their cryptocurrency better

Brian Kelly, founder and CEO of BKCM LLC, an investment firm focused on digital currencies, advised investors to hold their cryptocurrency in cold storage — which involves storing it offline — if possible.

Exchanges are "kinda the weak point here," Kelly said on "Fast Money" Wednesday.

Lee added that the cryptocurrency industry is relatively new, and exchanges are still learning to protect their funds.

"People have to get used to that, they really need to protect their coins much better than traditional finance," he said.

- Reuters contributed to this report.