Why Bitcoin price abruptly dropped 3% in 30 minutes on OKEx freeze

OKEx, one of the world’s biggest cryptocurrency exchanges, announced a temporary suspension of withdrawals on Oct. 16. Upon the news, the price of Bitcoin (BTC) abruptly plunged 3% in 30 minutes across major exchanges.

The nervousness in the market comes from the reason behind the withdrawal suspension and the potential implications it carries. 

The 15-minute price chart of Bitcoin. Source: TradingView.com

OKEx says a private key holder is cooperating with investigators, Bitcoin swiftly drops

The OKEx team said one of the private key holders of the exchange is cooperating with a public security bureau in investigations. The team said:

“One of our private key holders is currently cooperating with a public security bureau in investigations where required.   We have been out of touch with the concerned private key holder.  As such, the associated authorization could not be completed.  Pursuant to 8.1 Service Change and Interruption of the Terms of Service, OKEx may change the Service and/or may also interrupt, suspend or terminate the service at any time with or without prior notice.”

Immediately after the OKEx statement was released, the price of Bitcoin dropped from $11,514 to $11,190. The 3% drop occurred within a 30-minute span, causing a market-wide pullback.

Bitcoin exchanges typically implement a multi-signature system to process withdrawals from cold storage, i.e. a wallet that is not connected to the internet.

To transfer funds from the cold wallet, the exchange often distributes several private keys to the owners and executives. In a multi-signature system, all or the majority of key holders must be present to sign off transactions.

In the case of OKEx, the exchange said that one of the private key holders isn’t able to approve withdrawals. Jay Hao, the CEO of OKEx, said:

“All operations @OKEx except digital asset/cryptocurrency withdrawals remain unaffected. All your funds and assets are safe. The investigation concerns a certain private key holder’s personal issue only. Further announcements will be made.”

The price of Bitcoin fell sharply on the OKEx news for two main reasons. First, OKEx is a major exchange that processes substantial amounts of both spot and futures volume.

Second, when it concerns an exchange with ties to China, there is usually heightened market speculation. Red Li, the co-founder of 8BTC, said:

“OKEx first stated withdrawal will be suspended 15PM but quickly changed to 11AM. Rumor has it that over 800 accs in ‘certain’ exchange are involved with cross-border money laundering.”

Industry executives surprised by the news

Leo Weese, the president at The Bitcoin Association of Hong Kong, said he was surprised by the fact that one person could affect an exchange’s entire cold storage multi-sig system. He wrote:

“That one person sits in China holding the keys to an entire offshore cryptocurrency exchange is probably the most surprising thing about this industry I learned this year. That customers don't demand transparency about key management comes in at a close second, though.”

In the case of BitMEX, as an example, when the firm’s CTO Samuel Reed was arrested earlier this month, the majority of private key holders were able to sign off on transactions.