Bitcoin is a distributed, de-centralized financial payment system with no transaction fees. It works as a currency because the math underlying its creation and transmission of value through exchange networks is sound. Cryptocurrency is used by ordinary people, speculators…and a huge number of cyber criminals around the world.
Bitcoin is held in “wallets” (software for storing keys and passwords on computers or smartphones). Wallets share the characteristics of physical bags of cash. For most, there is no certain way to keep a crypto-currency wallet safe and secure, so wallets have been impacted by scams, hacks, and thefts of massive amounts.
It’s a Wild West environment with absolutely no regulatory protections. To combat hacking, Bitcoin holders, like ancient Roman noblemen, are left to their own devices to keep wallets safe and secure. It hasn’t been easy. Of the 16.4 million bitcoins said to be in circulation in 2017, close to 3.8 million may have been lost because their owners are no longer able to claim their holdings—that’s $34 billion in lost value just in Bitcoin, one of more than 1,500 different cryptocurrencies in existence.
Today’s bitcoin owner had better keep his or her wallet encrypted
Large amounts of Bitcoin should not be stored in clouds, stocks and markets. No matter where a wallet is stored, it still counts as data at rest, which makes it a target. Only small amounts should be kept on a mobile or online computer for everyday use, while most Bitcoin should be held on encrypted physical media and locked away safely. Many different approaches and hardware devices are available to keep offline cryptocurrency safe and sound—including good old paper records held in, well, good old physical wallets.
No matter how the wallet situation is handled, only strong hardware encryption of private digital currency keys can provide an ironclad last line of defense against theft.
The exchange to obtain bitcoins
Cyber criminals not only steal Bitcoins from wallets stored on systems connected to the Internet, they also hack into cybercurrency exchanges and other third-party platforms. The transfer of Bitcoin is anonymous, with transactions conducted using pseudonyms. Once a Bitcoin transaction has been approved by both sides, it cannot be reversed without the permission of the recipient. So if hackers succeed in engineering a fraudulent transaction with a mark, the victim’s cash is gone forever.
Behind it all is the fear that a future nefarious attack could permanently cripple a cryptocurrency exchange. There have been attacks on exchanges before. The 2014 hack of the Mt. Gox Bitcoin exchange resulted in the heist of $7.2 billion worth of Bitcoins. Mt. Gox ultimately filed for bankruptcy.
Keeping cryptocurrency wallets and exchanges safe from breaches
Keeping cryptocurrency wallets and exchanges safe from breaches is a challenge that is sure to wax—but perhaps never wane—over time, based on its extraordinary, exponentially growing and fluctuating value. Perhaps government regulation and traditional banking institutions will begin to play a moderating role for those who want stability, or maybe today’s borderline-insane Wild West atmosphere of greed and fear will prevail for decades. Whatever the future holds, preventing losses from cryptocurrency cyberheists will depend more on good encryption than law enforcement.