On February 21st, the cryptocurrency market experienced a black swan event: the Bybit exchange wallet was hacked, resulting in a loss of up to $1.5 billion, setting a new record for the largest security incident. Since the stolen crypto assets were mainly Ethereum and its staking certificates, ETH plunged more than 5% during the day, dragging down the broader market.

Although Bybit, the main party responsible for the security incident, has announced full compensation for user losses, the impact of the theft on the industry and the market has not yet ended.

First, whether Bybit has sufficient proprietary assets to make up for the asset gap caused by the theft remains an unresolved issue. Referring to Binance's asset situation in January, its $100 billion in client assets corresponded to $8.7 billion in reserves. Then Bybit's $15.7 billion in client assets should have a reserve of $1.37 billion. This means that the pressure to fully compensate client assets is still immense. Currently, whether through internal fund allocation or external financing to fill the funding gap, Bybit needs to audit the exchange's asset status and publicly disclose the results to restore market confidence as soon as possible. Otherwise, Bybit may face the risk of another bank run, triggering market panic.

Secondly, the main reason the hackers were able to breach Bybit's wallet was that they obtained the AWS S3 or CloudFront account/API keys of Safe.Global, and tampered with the front-end JavaScript files stored in S3 to inject malicious code targeting Bybit's cold wallet addresses. Many professionals believe that this security incident may involve insider collusion. As one of the important multi-signature wallet service providers in the Web3 field, SAFE currently manages over $100 billion in crypto assets, which has caused great market concern about the spillover of security risks. In addition, Bybit's weak security awareness in using an external wallet system and lack of secondary review for important transactions have led to a crisis of trust in decentralized exchanges. Therefore, it may take a long time to resolve the series of problems caused by the theft and rebuild market confidence.

In addition to the concentrated outbreak of internal risks, the impact of macroeconomic risks is also one of the important reasons for the continued decline in the crypto market. Against the backdrop of Trump's fiscal spending cuts and tariff threats, the US stock market has remained volatile, with the median decline of the tech seven giants reaching 13% in the past week. This has made it difficult for the crypto market to continue to enjoy the liquidity spillover from the US stock market. As a result, Bitcoin ETFs have also experienced record outflows as the US stock market plummets. Without policy-driven (national Bitcoin reserves) positive news or technological breakthroughs (fundamental improvement), the crypto market will continue to be under pressure from the US stock market's decline.

However, although the crypto market lacks innovative momentum, the valuations of most application-related tokens have fallen below 80% of their historical percentiles, and prices are still below 90% of their historical percentiles, meaning that the valuations of most projects have returned to the level when Bitcoin was at $15,500. The extremely low valuations have already reflected the sluggish fundamentals in advance. Furthermore, although the establishment of a national Bitcoin reserve faces huge resistance, Trump has begun to fulfill his campaign promise to "reverse the SEC's crypto regulation attitude" since last week.

First, in the past week, the US SEC has withdrawn its lawsuit against Coinbase and terminated its investigations into projects such as Robinhood Crypto, OpenSea, Uniswap Labs, and TRON. Uniswap co-founder Hayden Adams responded to the SEC's abandonment of the Uniswap investigation by saying that the SEC's previous investigation lasted three years, wasting a lot of time and millions of dollars, and had a significant impact on the company. The human, material, and financial pressures that need to be borne in litigation are not something that ordinary companies can afford. This means that many small and medium-sized projects will be doomed once the SEC sets its sights on them. With the end of the era of brutal regulation, the survival environment for blockchain projects will be greatly improved.

Secondly, President Trump will host the first White House Crypto Summit and deliver a speech on March 7th. The summit will be hosted by White House crypto czar David Sachs and managed by executive director of the working group Bo Hines. At that time, founders, executives, and investors of well-known projects, as well as members of the President's Digital Assets Working Group, will gather together. The goal of the summit is to establish a clear regulatory framework, promote innovation, and protect economic freedom. After the summit, Trump may sign a series of executive orders to promote the development of the crypto market. Although these policy-driven positive factors are unlikely to reverse the market's downward trend in the short term, the top-level design of crypto regulation and the acceleration of technological innovation will create favorable conditions for the next bull market.

In this round of adjustment, Meme coins have undoubtedly been the hardest hit in terms of valuation. The two most typical representatives, Ai16z and TRUMP, have plummeted 89% and 88% respectively in the past month. This also verifies the past market rule: the market capitalization growth driven by emotions will ultimately be retaliated by the ebb of emotions. Therefore, how rapid the rise of Meme coins, the decline will be equally brutal. It is worth noting that this decline may not be a regular technical adjustment, but a signal of a comprehensive recession of Meme coins, mainly for two reasons: 1) After TRUMP, Millie's LIBRA and the Central African Republic's CAR have both experienced "death upon exposure", which means that the game of pure capital speculation is difficult to sustain. 2) The largest launch platform for Meme coins, the average daily protocol fee this week is only $1.47 million, down 90.4% from the historical peak of $15.38 million. In 2022, the signal of the NFT recession was also the 90% plunge in OpenSea's revenue. More importantly, since the NFT hype logic was falsified by the market, NFTs have not had a decent rebound from 2022 to the present. In other words, the current investors trapped in Meme coins may never have the opportunity to get out.

According to Coinmarketcap data, the total number of crypto tokens currently recorded by the platform is 11.29 million, of which 99.2% have a daily trading volume of less than $50 million. And according to data disclosed by Coinbase CEO Brian Armstrong, the market is currently adding up to 1 million new tokens per week. From historical experience, when the market's entry threshold continues to decline and the supply of underlying assets continues to increase, capital will usually flow to the top projects, which will also gain higher valuation premiums. The current crypto market's issuance mechanism is even crazier than the registration system of the Hong Kong and US stock markets, and the trend towards the "Hong Kong-ization" and "US-ization" of the market will be unstoppable. Therefore, in the long run, only by adhering to fundamentals can long-term asset appreciation be achieved.

In the previous article, we mentioned that this round of decline has evolved from killing valuations to killing logic, marking the arrival of a deep bear market, and the market's sluggishness will last for a relatively long time. However, the most obvious feature of this week's adjustment is that the strong currencies have started to catch up, while the low-end ones have started to resist the decline, indicating that the embryonic form of a stage bottom has appeared. Of course, the process of bottoming out is also a very long one. Maintain patience and wait for the arrival of the new cycle.