First Mover: Bitcoin Surges to New 2020 High as Harvest Debacle Provides Costly DeFi Lesson

This week's $24M exploit of DeFi platform Harvest shows risks as real as rewards in open-beta crypto markets, where investor protection is minimal.

AccessTimeIconOct 27, 2020 at 1:25 p.m. UTC
Updated Sep 14, 2021 at 10:24 a.m. UTC

Bitcoin reached a new 2020 high of around $13,420 after rising on nine of the past 11 days. 

The cryptocurrency's recent rally despite a stalling of U.S. stocks has rekindled speculation that prices for the two asset classes are starting to diverge after a recent stretch in which they appeared highly correlated. 

"We have discussed the potential for a decoupling from traditional financial markets," analysts for the blockchain data firm Glassnode wrote Monday. "It is too early to tell."

Matt Blom, head of sales and trading for Diginex, said bitcoin bulls might try to push prices by the end of October above $13,863, the current record for an end of month price. After that, the next price target would be the 2019 high of $13,868. 

In traditional markets, U.S. stock futures pointed to a higher open, even as lawmakers departed Washington to campaign, an apparent death knell for last-ditch efforts to pass an economic stimulus package prior to the Nov. 3 election. 

Market moves

The fast-evolving realm of decentralized finance, or DeFi, has attracted large sums of money this year from venture capitalists and traders alike. At last count, some $11 billion of bitcoin and other cryptocurrencies had been socked into the semi-automated, blockchain-based trading and lending platforms as collateral, a 16-fold increase since the start of the year.

But every month or so, the fledgling industry produces a debacle so suddenly and bizarrely that sane observers have no choice but to step back and remember that the whole exercise is really just a giant game, played with real money. Or a laboratory. Or both.

Such was the case with the latest exploit to hit DeFi: the siphoning off of the equivalent of $24 million in digital tokens from a protocol called Harvest Finance. 

As reported by CoinDesk's Will Foxley, an attacker used a complex and sophisticated strategy involving "flash loans" and a series of arbitrage trades involving the DeFi protocols Uniswap, Curve and Harvest. Massive amounts of the dollar-linked stablecoins tether (USDT) and USD coin (USDC) were swapped back and forth, causing their prices to swing wildly and allowing the attacker to profit from the resulting distortions.

Prices for Harvest's tokens, FARM, tumbled by 65%, and total collateral in the project plunged to $430 million from about $1 billion. The attacker eventually swapped the proceeds into bitcoin.

Rapid sell-off in prices for Harvest's FARM tokens shows the extreme risks of DeFi investing.
Rapid sell-off in prices for Harvest's FARM tokens shows the extreme risks of DeFi investing.

There wasn't really any hacking involved, just an exploitation of the Harvest system, which is really just a bunch of computer programming. It wasn't illegal, apparently, so a debate ensued on Twitter over the ethics and optics. Harvest officials called it an "engineering error" in a blog post on Medium. They pledged to explore "remediation methods," but that's yet to be determined.  

Later Monday, Jesse Powell, CEO of the Kraken cryptocurrency exchange, unleashed an F-bomb-laced Twitter tirade against "DeFi scams," concluding with the gracious and sagacious dictum that "taking your losses is the only way to enlightenment," as reported by CoinDesk's Sebastian Sinclair

The lesson is that high profits from DeFi come with the risk not just of bad directional bets but also the chance that some savvier user is playing by different rules. In a market built entirely on a set of codes, what's allowed and what's possible are really one and the same.

One reason innovation occurs so rapidly in DeFi is there's no investor-protection regulator. That's the trade-off: Wallet casualties are written off in the name of development.   

– Bradley Keoun

Bitcoin watch

Bitcoin daily price chart.
Bitcoin daily price chart.

Bitcoin has jumped to 16-month highs despite renewed coronavirus-induced risk aversion in global stock markets.

The top cryptocurrency clocked a high of $13,450 a few minutes before press time, a level last seen in July 2019, surpassing the previous 15-month high of $13,300 reached last week.

The move higher looks impressive, given that European stock markets are trading in the red on coronavirus concerns. The price divergence comes amid new signs of increasing institutional interest in bitcoin, with several public companies disclosing investments in the cryptocurrency over the past few weeks.

The rally looks set to continue as on-chain data shows no signs of investor trepidation due to the risk-off sentiment in stocks. The number of daily on-chain deposits to cryptocurrency exchanges fell to a nine-month low of 26,889 on Monday, and the total number of bitcoins held on exchanges slipped to a fresh two-year low of 2,478,799 BTC, according to data source Glassnode.

Investors typically move coins from their wallets to exchanges to liquidate holdings when expecting a price slide and take direct custody of their coins when the cryptocurrency is expected to rally.

"The decline in transfers to exchanges despite risk-off in equity markets is a bullish sign," Matthew Dibb, co-founder, and COO of Stack Funds, told CoinDesk in a WhatsApp chat while adding that the cryptocurrency is likely to see further strength in the coming weeks.

- Omkar Godbole

What's hot

JPMorgan's wholesale payments token, JPM Coin, to see usage from major tech firm starting next week, exec tells CNBC (CoinDesk)  

Singapore bank DBS looks to be planning digital asset exchange, cashed web page shows (CoinDesk

Huobi exchange allows customers to use credit or debit cards to buy cryptocurrencies without redirect to third-party payments portal (CoinDesk)  

U.S. government pursues civil forfeiture claim on more than 300,000 tether after they were reported stolen in hack earlier this year (CoinDesk)

Wyoming governor says state has opportunity to capitalize on crypto and blockchain tech before some other major blue chip company or university does it (CoinDesk)

PayPal's new crypto service could create tax headaches for users, even if they're just buyjng a cup of coffee (CoinDesk)

DeFi protocol Notional lets users lend and borrow cryptocurrencies at fixed rates instead of the more typical variable rates (CoinDesk)


The latest on the economy and traditional finance

There's a new "big short" trade forming on Wall Street – betting against U.S. Treasury bonds (Bloomberg)

Wall Street's "fear gauge" jumped to its highest point in almost two months as a result of the uncertainty surrounding the upcoming U.S. presidential election slated for Nov. 3 (Reuters)

Volkswagen CEO says auto industry doesn't need another round of stimulus (FT

Ant Financial IPO subscriptions exceeded allotted shares for institutional investors within first hour (Nikkei Asia)

A few pennies on the dollar is as good as it gets for bondholders of J.C. Penney, Neiman Marcus (Bloomberg):

Falling values from credit-default swap auctions show just how threadbare recoveries are becoming on soured corporate debt.
Falling values from credit-default swap auctions show just how threadbare recoveries are becoming on soured corporate debt.

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CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.