Exchange hacks are good for the price of Bitcoin

Exchange hacks are good for Bitcoin? How do you reckon? Isn’t it bad when exchanges get hacked? That is what intuition would dictate, but applying level two thinking shows otherwise. Higher level thinking means understanding second-order, non-obvious consequences of actions, and multiple possibilities. It’s bad for those who lose their Bitcoin (the obvious consequence), but existing Bitcoin holders benefit due to reduced supply (the non-obvious consequence).

The reason is, Bitcoins on an exchange can either be:

1. Sold and converted into fiat, which makes the price go lower.
2. Returned to users’ wallets, which has no affect on price.

Having the Bitcoin stolen transfers the coins to the thief’s wallet. This eliminates the first possibly.

Although the thief can try to convert his bounty into fiat, the process is slow and often done off-exchange, and thus does not impact the price.

The massive Bitfinex hack in 2016 removed 100,000 Bitcoins from circulation that could have otherwise been sold. When the price of Bitcoin began to rise in early 2017 from $800 to as high as a $20,000, the hack victims who would have otherwise had Bitcoin, were unable to sell. It’s possible that had a fraction of those 100,000 Bitcoins entered the market as the price was rising, Bitcoin would have never gotten as high as it did.