Critical Announcement: Tether Got Hacked
On November 19, 2017, unknown hackers stole $30.95 million of crypto funds from the “Tether Treasury” wallet. Given the number of digital thefts in and out of the cryptocurrency space, it shouldn’t come as a surprise that Tether got hacked.
However, there are questions that need answering. Chief among them is: How should investors protect their cryptocurrency? This report will try to answer that question.
It should act as a best-practices guide for storing cryptocurrency, though it will also contain an analysis of Bitcoin and Ethereum prices. This report will attempt to “see around the corner” and, by the end of it, readers should have a basic understanding of the challenges that lie ahead.
We understand that this sounds quite heavy and pessimistic, but you might emerge from this report feeling quite optimistic about cryptocurrencies.
After all, we firmly believe that, despite the ongoing security risks, cryptocurrencies are the most promising investment opportunity of 2018. T’was so in 2017, and so it shall be again.
But let’s get down to business…
What Is Tether?
Tether is a blockchain-based currency that is pegged to the U.S. dollar. It trades under the symbol “USDT” and each token is equal to one U.S. dollar. Its main purpose is to help investors transfer money between cryptocurrency exchanges.
If that definition is still unclear, try to imagine the following scenario (it’s a good way to understand what Tether does):
You have $10,000 to invest in cryptocurrencies. You want to invest half in Bitcoin ($5,000), one quarter in Ripple ($2,500), and one quarter in Ethereum ($2,500).
Bitcoin and Ethereum you can buy through Bitfinex, but in order to buy Ripple, you have to make an account on a different exchange. Maybe Kraken. Those are Account One and Account Two, respectively.
Now comes the tricky part.
You’ve heard about ICOs and all the new currencies popping up. You’ve heard that some of them spike by +10,000% in just a few weeks. It sounds like the perfect opportunity for you to make millions, but these ICOs don’t trade on Kraken.
So, you make an account on yet another exchange. Call this Account Three.
How do you transfer the funds from Account One to Account Three? You can theoretically sell your existing Bitcoin into USD, withdraw those funds to your bank account, and then invest them into Account Three. But it is an awfully long process.
That’s where Tether comes into the picture.
It acts as a bridge from exchange to exchange. Investors simply buy USDT on one exchange and sell it on another. And there’s little risk of the currency’s value changing in the interim because it has a fixed “1-to-1” ratio with the U.S. dollar. Clever, isn’t it?
Tether Treasury Wallet Hack
Tether gained traction in part by having a good idea, but that didn’t prevent $31.0 million USDT from being stolen straight from its Treasury wallet. Hackers managed to re-route $30,950,010.0 million to an unauthorized Bitcoin address, which Tether revealed in its official statement.
“$30,950,010 USDT was removed from the Tether Treasury wallet on November 19, 2017 and sent to an unauthorized bitcoin address,” read the statement.
“The attacker is holding funds in the following address: 16tg2RJuEPtZooy18Wxn2me2RhUdC94N7r. If you receive any USDT tokens from the above address, or from any downstream address that receives these tokens, do not accept them, as they have been flagged and will not be redeemable by Tether for USD.” (Source: “Tether Claims $30 Million in US Dollar Token Stolen,” CoinDesk, November 21, 2017.)
The company also explained what it is doing in response to the hack. It is:
- Halting Tether’s back-end wallet (temporarily). This step seems pretty obvious as the company has to figure out how hackers gained access. Then, once it finds the hole, it has to plug it.
- Implementing new code to lock the stolen funds in place. Tether is trying to stop the hacker from transferring money out of the unauthorized account. If it can do that before the funds are laundered, it’ll be a big step towards fixing the problem. However, this step could result in a “temporary” hard fork.
- Researching ways to retrieve the stolen funds. Tether doesn’t want to restore the funds by simply turning back time on the blockchain. This means that it has to come up with a novel solution to unlocking the funds and returning them to users.
Are Bitcoin and Ethereum Dropping?
Neither Bitcoin prices nor Ethereum prices were affected by the fact that Tether got hacked. Which is, to be honest, a little strange.
Investors would normally run scared at the idea of losing money to hackers. And it’s not like cryptocurrencies have the best track record when it comes to security.
For example, an Ethereum client known as Parity Technologies recently had a security issue that compromised more than $156.0 million of ETH tokens. Worse still, that wasn’t the first time that Parity lost users’ funds.
There was a similar incident months before that involving $30.0 million worth of ETH.
Bitcoin also suffered attacks constantly, beginning with the infamous Mt. Gox hack. Some of you might remember that attack, in which hackers broke into a Japanese exchange called Mt. Gox, ultimately making off with $460.0 million in Bitcoin.
Given this sordid history, you would assume that Bitcoin prices and Ethereum prices would crash after Tether made its announcement. Right?
Well, you would be wrong. Here’s the Bitcoin price chart for the last 30 days:
The only downturn in Bitcoin prices came from a sharp rotation into Bitcoin Cash. But in that case, investors were reacting to a civil war in the Bitcoin community, not millions of dollars being pilfered from a major blockchain company.
The same is true for Ethereum prices. Just take a look at the Ethereum price chart:
Do you see what I mean? The trend lines for both cryptocurrencies are up and to the right.
How to Safeguard Your Bitcoin or Ethereum
Now to the most important question: How do you protect your Bitcoin or Ethereum?
There are, of course, competing answers to this question.
That said, I would personally store my digital coins in a hardware wallet. The “Ledger Nano S” is a good example. It looks like a USB stick, functions like a USB stick, and has the added benefit of working with Bitcoin, Ethereum, Litecoin, and Ethereum Classic.
There’s simply no replacement for storing your cryptocurrency offline, far from the kleptomaniacs roaming the Internet. It seems like the obvious move. In fact, high-security documents are often stored on “air-gapped computers” that are not connected to the Internet.
This is essentially the same principle scaled down for individual use.
Plus, having your BTC or ETH tokens stored in this isolated environment will help you relax. Once you realize that you can physically hold the device storing your crypto funds, you’ll sleep much better at night.