Criminals hid spy parts in hardware wallets, and Bitcoin bounced back

The story

Hardware wallets tampered before sale

Ledger says an organized group bought genuine hardware wallets, hid parts inside that read the 24-word recovery phrase during setup and sent it out over a mobile connection, and sold them on through resellers in Southeast Asia. Estimates of the losses run from more than $86 million to $103 million, and Ledger has confirmed none of them. Ledger says its own chips, software and direct sales were never compromised. It has asked resellers across the region to pause sales, and tells buyers from the affected reseller to move their coins to a new device with a new recovery phrase. Whoever sees your recovery phrase can empty your wallet, so how a wallet reaches you matters.

The bigger picture

Inflation scare, stocks stumble

Inflation runs hotter. Prices rose 3.7% in the year to September, above the 3.6% economists expected and up from 3.4% in August. Bets on an October Fed rate rise roughly doubled, then eased. Higher rates for longer keep cheaper money out of reach, and crypto needs cheaper money.

Stocks sink worldwide. On Thursday South Korea's main stock index fell about 8% and Japan's about 5% in morning trading, after chip stocks lost nearly 12% in six sessions. When investors dump risky stocks, crypto tends to get sold alongside them.

Bitcoin and Ethereum

Bitcoin dropped about $1,000 within minutes of Wednesday's inflation report, slid below $81,000 on Thursday, then bounced to finish near $82,300. Money came into the US Bitcoin funds on Tuesday, then left on Wednesday.

What people are talking about

Quantum nerves linger. Coinbase's head of cryptography says there is no evidence of a break, answering an Ethereum researcher's warning.

Washington's crypto bench thins. Patrick Witt has stepped down from the White House crypto council, the second head to leave.

Brokers open up. Charles Schwab finished rolling out Bitcoin and Ether trading and plans to add Solana by year-end.

Expert voices

What could change

0:00 · Intro

Hey, welcome back. Charles Schwab finished letting its customers buy Bitcoin and Ether this week. And Solana's biggest upgrade has a date, next Wednesday.

But US prices rose 3.7% in the year to September, stocks in Asia fell hard on Thursday, and Bitcoin dipped below $81,000. On top of that, criminals were found to have hidden spy parts inside hardware wallets before they reached the people who bought them. So what actually moved the price this week, and what should you take from the wallet story?

0:35 · Where the market stands

So let's look at the state of play.

Bitcoin is around $82,300, up about half a percent on the week. That sounds calm, but on Thursday it fell below $81,000 before bouncing back. Ether is around $2,440, down about 1.5%. And the Fear and Greed index, the gauge that tracks the market's mood, reads 63. That's "greed." On Thursday it read 53, so it jumped 10 points in a day, and it's 4 points above last Friday.

1:06 · Hardware wallets tampered before sale

And so to this week's story.

This week's biggest crypto story is about hardware wallets. If you're not familiar, a hardware wallet is a small device that keeps your keys to your crypto offline. When you set one up, it shows you a 12 or 24-word recovery phrase. Anyone who gets those exact words can empty the wallet.

Ledger is one of the biggest makers of these. On October 9th, thefts surfaced involving Ledger wallets sold by a reseller called CryptoBilis in Malaysia, Indonesia and the Philippines. Ledger says an organized criminal group spent months buying genuine devices, hiding parts inside them, and putting them back on sale through resellers in Southeast Asia. During setup, those parts read the 24 words off the screen and sent them out over a hidden mobile connection. The devices looked genuine, because Ledger's own security chip was left untouched.

Investigators estimated the losses at somewhere from $86 million to $103 million. Ledger hasn't confirmed any total.

Ledger says its chips, its software and its servers were never compromised, and that its own direct sales are unaffected. It has asked resellers across Southeast Asia and Hong Kong to pause sales. If you bought from CryptoBilis, Ledger's advice is to move your coins to a new device with a new recovery phrase.

Tampered devices have also been reported in Germany and Singapore, but Ledger hasn't confirmed thefts outside Southeast Asia.

So where your wallet comes from matters. Whoever sees your recovery phrase can empty it.

Be careful out there.

2:55 · Inflation scare, stocks stumble

And now we zoom out to the big picture.

Now, what moved the price. On Wednesday the US reported that prices rose 3.7% in the year to September. Economists expected 3.6%, and in August it was just 3.4%. Within minutes, Bitcoin dropped about $1,000.

Bets that the Fed would raise interest rates again in October roughly doubled, to about 50%, and then eased when Fed officials said they can wait.

On Thursday, stocks in Asia fell hard. South Korea's main index dropped about 8% in morning trading, and Japan's about 5%. That came after a key group of chip stocks lost nearly 12% in 6 trading days, partly on worries about debt-heavy AI companies like CoreWeave.

What does that matter for crypto? When investors sell risky stocks, they tend to sell crypto too, and this week Bitcoin moved with them. And higher rates for longer keep cheaper money out of reach, which is what crypto holders are waiting for. The Fed's next decision is on October 27th to 28th.

4:04 · Bitcoin and Ethereum

And so to the major cap cryptos.

Bitcoin first. The price followed inflation this week. Investors put money into the US Bitcoin funds on Tuesday, then took it back out on Wednesday.

Ether is down about 1.5% and investors kept pulling money out of Ether funds. And then you've BitMine, the company that holds more Ether than any other, has said it will stop buying once it owns 5% of all the Ether there is, and it's very close to that now.

And Solana's Alpenglow upgrade is scheduled to go live next Wednesday, October 21st. It replaces voting systems Solana has used since it started, and it aims to make transactions final in about 150 milliseconds, and that's down from about 12.8 seconds today.

4:50 · What people are talking about

Now, what's on the community pulse?

Nothing has been broken, but people are still arguing about quantum computers. Justin Drake, an Ethereum researcher, warned that AI-assisted math could one day work out keys that protect wallets. Yehuda Lindell replied that there is no evidence of a break in the math that protects them. For now it's a debate, not an attack.

In Washington, Patrick Witt stepped down as executive director of the White House crypto advisory council. He's the second person to leave that job.

And Charles Schwab says it has finished rolling out Bitcoin and Ether trading to its customers. It plans to add Solana by the end of the year.

5:31 · Expert voices

Let's hear from some expert voices.

We have Michelle Bowman, the Fed's vice chair for supervision, said on Wednesday at a conference in Bangkok: quote, "We have some time to wait and see how financial conditions evolve before we take more action." Unquote. So a Fed official is saying there's no hurry to raise rates again. Note it's "some time," not "never." Many believe they're going to come before the end of the year.

And then you've Terrence Duffy, the chief executive of CME Group, was talking on Tuesday about prediction markets, which are websites where people bet on real-world events. He said: "This will go to the Supreme Court, and I think that the states and the tribes will prevail." He means the fight over who regulates them is headed for the highest court.

Matt Hougan, the chief investment officer at Bitwise, wrote in his weekly memo: "There are a lot of different paths for the economy. All of them lead to bitcoin." That's his argument that bitcoin benefits whichever way the economy goes. It's a view, not a forecast.

And Ki Young Ju, the chief executive of CryptoQuant, posted on Tuesday: "Bitcoin bear cycle is over, expecting 12 to 24 months of bullish or sideways price action." In March of last year he posted the opposite. Note the "or sideways."

6:53 · What to watch next

And so, what could change?

Well, next week I'm watching whether investors put money back into Bitcoin funds for more than a day, and whether more Fed officials say what Michelle Bowman said.

The Fed meets on October 27th and 28th.

On Wednesday, November 11th, the index company MSCI is due to publish a list of companies affected by new rules that could remove Strategy, Metaplanet and SharpLink from its indexes. That could have major implications to their share price.

And the next day, Europe's banking authority starts supervising USDC.

Everything you just heard comes from The Crossover, our free daily newsletter. Crypto and macro, in plain English, in your inbox every weekday.

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9:01 · The bottom line

So what moved the price this week? Inflation.

Yes, US prices rose 3.7%, stocks sank across Asia, Bitcoin dipped below $81,000, and criminals hid spy parts inside hardware wallets before they reached their owners. But Schwab finished letting its customers buy Bitcoin and Ether, Solana's upgrade has a date, and Bitcoin ended the week a little higher than it started.

Thanks for watching, have a good weekend.

The Crossover Weekly is for information and education. It isn't financial advice. Read our disclaimer.