In today’s Finshots, we break down the WazirX crypto hack and explore possible ways to steer clear of similar disasters in the future.
But before we dive in, we’ve got some exciting news that we spilled in our Sunday newsletter. It’s something we wanted to share exclusively with you before we told the world. Check it out here if you missed it!
The Story
Understanding cryptocurrencies can feel like trying to juggle maths, science, tech and investing all at once. Confusing, right? So, let’s simplify things and break it down like we’re five. Sounds good?
Alright, so you know how we use money — like the cash in your wallet or the funds in your bank account? Well, cryptocurrencies (cryptos) are like money too, but they only exist online. You can’t hold them like a coin or note.
The cool thing about cryptos, like Bitcoin, is that they work 24/7, without any bank, government or individual controlling them. They’re powered by something called Blockchain.
Think of blockchain as a giant notebook that everyone can see and write in. But no one can erase or edit what’s written. This notebook is shared across millions of computers (called nodes). So every time you buy or sell crypto, it gets recorded in this notebook. And if anyone tries to mess with it, the other computers (nodes) immediately reject those changes, making it incredibly difficult to alter past transactions.
That’s exactly why blockchain is seen as super secure, and why people place so much value on crypto. Amazing, right?
But here’s the kicker. While the blockchain itself is tough to crack, the wallets and platforms where you store or trade your crypto aren’t always as foolproof.
Just look at what happened at WazirX. It’s one of India’s largest crypto exchanges, an online platform or market where you can buy, sell or trade cryptocurrencies. And it recently made headlines when hackers managed to swipe around $230 million worth of cryptocurrency from one of its wallets, where investors’ crypto were stored.
To put this in perspective, imagine that you bought Bitcoin (BTC) on WazirX, and your investment was doing great. But then, on July 18, 2024, hackers hit WazirX, and overnight, you could have lost up to ₹50 for every ₹100 you invested.
Now, imagine that it wasn’t just you. Millions of Indians felt the sting too. Ouch!
That’s what happened at WazirX. At the time of the hack, WazirX had over 16 million users and held $570 million in customer balances. About 4.2 million users, or 25% of the total, were affected and saw their crypto balances drop by nearly half. WazirX had to freeze all trades and halt withdrawals temporarily. When withdrawals did start again, you could only take out two-thirds of your balance, but in phases. Things took a turn when WazirX struggled to sort out the mess. And now, it’s all tangled up in the High Court of Singapore, where its parent company, Zettai Pte, is based.
And this begs the question — If hackers can steal crypto, how is it even safe??
Well, remember what we told you earlier? Blockchain itself may be rock-solid secure, but crypto wallets and platforms? Not so much.
The WazirX hack didn’t occur on the blockchain. What got compromised was the exchange’s wallet, not the cryptocurrency or the underlying tech. It’s a bit like banks getting hacked and leaving your money in limbo. The only difference is that banks in India are protected by the government, but crypto isn’t officially recognised by any authority here. So, when something goes wrong, investors find themselves without any legal protection.
So what’s the way out, you ask?
Well, cold wallets!
See, cryptocurrencies were created to be decentralised, meaning no single entity controls them. But when you use exchanges, you’re basically trusting them to keep your crypto safe. And that kind of goes against the whole idea of decentralisation.
So, when it comes to securing your crypto, it really boils down to two key things:
- Who controls the private keys (the secret passcode that gives access to your crypto)?, and
- Whether your wallet is connected to the internet.
Most exchanges actually hold the private keys to your crypto, meaning you only get a login password. This is known as a custodial wallet, and it means that the exchange has control over your crypto. So, if something happens to the exchange — like a hack — you could be at risk of losing your assets. That’s a big fail on the security front.
Enter the cold wallet — a physical device, kind of like a super-secure USB drive, where you can store your private key offline. These wallets aren’t connected to the internet (hence the term “cold”), making them much safer from hackers. You set it up with your private key, and when you need to make a transaction, you connect it to your computer or phone. And this setup passes the security test with flying colours.
With a cold wallet, you hold the private keys, and since it’s offline, your crypto is truly in your hands — no middleman, no exchange, no third party. It’s the closest you can get to real crypto independence.
But here’s the thing. Cold wallets are perfect for long-term investors who don’t need to trade often. If you’re someone who buys and sells crypto frequently, you might need the quick access that exchanges offer. Plus, not everyone knows about cold wallets or feels comfortable using them. They can be a bit pricey and technical to set up, which makes exchanges the easier option for a lot of people.
That said, more and more investors globally are opting to move their crypto, especially Bitcoin, off exchanges and into cold wallets.
And the proof is in the pudding. In January 2024, the total Bitcoin balance on exchanges was about 2.7 million BTC. Today, it’s down to 2.4 million BTC. That’s 300,000 Bitcoins pulled from exchanges and moved into cold wallets in less than a year.
But in India, the story is different. Indian crypto exchanges have seen a surge in user registrations and deposits. Thanks to the Finance Ministry which blocked access to foreign crypto exchanges in December last year. This pushed Indian platforms to swoop in with massive discounts and cashback offers, sparking a boom in user growth. Deposits increased anywhere between 100% to 2,000%. Plus, about $4 billion worth of Indian crypto assets were sitting in foreign exchange wallets as well.
If you look at WazirX itself, in 2023, 600,000 new users signed up on the platform, with BTC leading the charge as the most traded crypto. Between October 2023 and March 2024, WazirX saw a 122% spike in sign-ups and a 217% jump in trading volumes.
This just goes to show how much Indians rely on exchanges to manage their crypto, making them outliers in the global crypto space. While investors worldwide are pulling their assets off exchanges, Indians seem to be sticking with them.
Maybe it’s because India’s crypto market is still developing, or perhaps it’s because we have a large number of traders who need fast access for frequent trading.
Could this trend change now that crypto users are losing trust in exchanges and wallets after the WazirX hack? That’s anyone’s guess.
Until then…
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