Cryptocurrency trader Cryptopia’s estimated loss of $23 million to computer hackers is attracting major attention on internet news services.
It has more than two million followers worldwide who joined the trading exchange created about two years ago by a group of Christchurch-based entrepreneurs.
Cryptopia was so popular because it traded more altcoins than any other cryptocurrency exchange – altcoins are alternatives to the well known computer-generated bitcoin.
Altcoins are traded under hundreds of different names, creating a speculator’s paradise, with Cryptopia trading more than 500 of them.
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Cryptopia’s entrepreneurial creators Rob Dawson and Adam Clark were viewed as somewhat anti-establishment, adding to their allure.
Were most of Cryptopia’s traders just nerdy young men playing computer games?
Cryptopia’s clients largely matched the general population, from students to retired people.
About 98 per cent of its traders were overseas speculators.
Was the estimated $23m of unauthorised transfers of cryptocurrency coins from Cryptopia trading clients real money?
The best comparison is the sharemarket. An investor might buy a share in a company listed on the stock exchange for $10.
Over time, the value of the share may rise to $20 as other investors buy and sell them, affecting the price.
But unless the owner sells the share and receives $20 from another investor, the original outlay remains $10.
The $23m reported theft represented the value of the cryptocurrency coin values when stolen. The actual loss to an individual investor would be the amount initially paid to buy the digital coin – but they also lose any potential to sell at a higher value.
How was Cryptopia’s trading exchange different to trading shares?
Share values are based on the estimates of a company’s assets and earning potential. They usually have real asset backing even if profit forecasts may be inflated.
There are rules and regulatory authorities that control sharemarket-listed companies, requiring regular auditing, independent valuations and reporting. None of these things apply to cryptocurrencies.
How did Cryptopia make its money?
It charged commissions on trades, and a fee to list a particular cryptocurrency.
Is it the first cryptocurrency exchange to be hacked?
There have been many similar cases overseas. In 2018 there were estimated thefts of nearly $1 billion when hackers broke into traders’ accounts.
Mainstream banks are also victims of fraud, but they usually offer compensation if a manager or hacker steals customers’ money. There is no redress when it comes to cryptocurrency exchanges.
What chance do police have catching the culprits?
People in the industry doubt police will catch the hackers because owners of coins can remain anonymous even though the coins can be tracked to other exchanges. A New York company called Elementus has already tracked the coins to various overseas exchanges.
The identity of thieves is usually only revealed when they want to cash up and must use mainstream banks which record transactions.
The thieves may be unable to cash up, and the coins might remain anonymously owned on whatever exchange they end up on.
Many commentators have questioned the motives or competence of the hackers given the problem of cashing up.
What is the point in creating the altcoins traded on Cryptopia?
Speculation mainly, because they don’t play a big role in retailing.
There are numerous scenarios. For example, someone might create a cannabis cryptocoin in the expectation that they may become valuable in a country where cannabis is about to be legalised, and could be used to buy product cheaply if the coins were bought in a discounted initial coin offering.
Are there legitimate uses for cryptocurrency?
They can and are used to sell and buy products around the world without incurring currency exchange bank fees.
But trading the coins on exchanges like Cryptopia means their value can fluctuate wildly, as in bitcoin’s case. And there is no asset like gold or central bank system to back up their value.
Where did Cryptopia’s founders get the idea?
Cryptocurrency is an extension of the credit card concept and web-based pay systems like PayPal, as an alternative to cash.
What happens to traders whose accounts are frozen at Cryptopia?
It depends on whether the company can continue as a going concern given the reputational damage, its reserves, and any claims.