Bybit Hack: Crypto Industry's Largest Heist Disrupts Coinbase's SEC Celebration

Major theft undermines optimism from Coinbase's legal victory

The cryptocurrency sector was initially upbeat following Coinbase Global Inc.'s announcement regarding the potential dismissal of a legal case by U.S. securities regulators against the leading digital asset exchange. This positive atmosphere, however, quickly dissipated when news broke that Bybit, a prominent exchange, had suffered a major security breach, resulting in the theft of nearly $1.5 billion worth of digital tokens.

The sudden shift in market sentiment highlighted the inherent risks associated with cryptocurrency trading. Critics of President Donald Trump’s attempts to loosen regulations in the industry seized the opportunity to voice their concerns, emphasizing the vulnerabilities present in a largely deregulated market. Hilary Allen, a professor at American University’s Washington College of Law, remarked, “Deregulated markets sound good until you have this type of attack. In the short term, we are seeing a lot of cheering for the peeling away of a lot of regulations. But be careful what you wish for.”

Traders logging in that Friday morning were greeted by the announcement that the Trump-era Securities and Exchange Commission (SEC), pending approval from new commissioners, was on the verge of permanently dismissing its lawsuit against Coinbase for allegedly operating an unregistered exchange, brokerage, and clearing agency. Following this news, Coinbase's shares surged nearly 6% in premarket trading, propelling Bitcoin prices toward the $100,000 mark for the first time in over two weeks. Ether, the second-largest cryptocurrency, experienced a more than 4% increase.

However, these gains were short-lived. Market watchers soon observed significant and suspicious withdrawals of Ether from Bybit, which operates out of Dubai and boasts a daily trading volume exceeding $36 billion. Bybit quickly confirmed the hack, with CEO Ben Zhou explaining that hackers gained access to a specific cold wallet and transferred all its Ether to an unidentified address. In an attempt to reassure users, Zhou held a livestream on social media platform X, telling viewers that their funds were safe and that withdrawals remained open. He stated that Bybit was seeking bridge loans to manage what he called a “massive bank run” on the exchange, using its own tokens as collateral.

The wave of withdrawal requests sparked fears reminiscent of the catastrophic collapse of Sam Bankman-Fried’s FTX exchange in 2022. Fortunately, the current market landscape includes proof-of-reserves data available online, which lessens concerns about liquidity issues. Prior to the hack, Bybit had approximately $16.2 billion in assets, making the stolen Ether and its derivatives represent around 9% of the exchange’s total assets.

Nevertheless, this incident derailed the early rally in the cryptocurrency sector, leading to what Alexis Sirkia, chairman of Yellow Network, described as “panic selling and liquidity disruptions.” Bitcoin prices fell almost 5% from their earlier highs, trading below $95,000 as stock markets closed in New York. Ether, targeted in the Bybit hack, plummeted more than 8% from its peak of the day, while smaller altcoins and meme coins like Dogecoin suffered even greater losses, tumbling 10% from their highs.

Benjamin Schiffrin, director of securities policy at Better Markets, reflected on the day’s events, stating, “Today’s events just demonstrate that crypto and memes are not just highly volatile and susceptible to scams and fraud but also vulnerable to hacking incidents where investors’ money can simply be stolen.” As discussions in Congress revolve around implementing a light-touch regulatory framework for the cryptocurrency industry, he warned that such minimal oversight will not prevent financial losses in incidents like the Bybit hack.

As digital tokens on Bybit lost their value, Coinbase's stock also declined sharply. The shares erased all of their earlier gains, ultimately closing down over 8%, marking the largest drop of the year and bringing the stock to its lowest price since November. The excitement that had followed the SEC announcement, including a nearly 1,000-word post from Coinbase CEO Brian Armstrong on social media, faded quickly. Armstrong's tweet featured an illustration depicting a Wild West gunslinger wearing a vest emblazoned with the Coinbase logo, facing off against an opponent adorned with the SEC logo.

Shuyao Kong, co-founder of the blockchain startup MegaETH, noted the significance of both events occurring on the same day, stating, “I think the scale of both together on the same day is a big hit and a reminder that crypto has major systematic risks.”

In response to the tumultuous day, Coinbase's chief legal officer Paul Grewal criticized former SEC Chair Gary Gensler for focusing on punitive actions against the industry rather than creating regulations aimed at consumer protection. Grewal expressed optimism that the new SEC administration recognizes that comprehensive digital asset legislation from Congress is essential for the future of the industry.

Despite the chaos, one quote from Armstrong's earlier tweet remained particularly resonant: “As Bain in The Dark Knight says, you merely adopted the dark; I was born in it.”