The security of Bitcoin transactions is one of the main draws of the new digital currency. Each Bitcoin transaction is publicly recorded and irreversible, while individual identifying information is kept secure and practically untraceable.
Yet, ironically, some of the qualities that make Bitcoin so secure also make the digital currency irresistibly attractive to thieving hackers.
Blockchain: The Bitcoin Recorder
Every single Bitcoin transaction is publicly recorded in a public ledger called the blockchain. Unlike credit card transactions which are subject to chargebacks, once a Bitcoin transaction is added to the blockchain, it’s irreversible. The blockchain is also completely public, meaning your address and the amount of Bitcoins involved are displayed for everyone to see. The private keys to your wallet, however, along with personally identifying information, are kept encrypted and secret.
The public nature of Bitcoin transactions discourages fraud. At the same time, one of the main attractions of Bitcoins is the anonymity of the currency. Unlike online transactions using credits cards or bank accounts, the transaction is more difficult to trace back to an individual, maintaining your privacy online.
But while Bitcoin transactions are secure, Bitcoin wallets may not be as safe as people think.
While the transactions themselves may be secure, your Bitcoins are only as safe as the wallet they’re kept in. Just like traditional currency, they can be stolen—although it takes a little more technical savvy than just grabbing a wallet.
To steal your Bitcoins, hackers have created viruses and malware that will automatically discover your private keys and transfer your money into their own wallets. And since Bitcoin transaction are irreversible, once the money’s gone there’s nothing you can do.
What Bitcoin Owners Can Do
As a Bitcoin owner, you can take preventative measures to keep their information safe, such as keeping your private keys separate from your wallet address so that hackers can’t easily connect the two. When you’re ready to make a transaction, you should carefully research vendors and exchanges to evaluate the security measures they use to keep your information safe.
If you’re going to invest in Bitcoins, you need to educate yourself on the ways hackers can access your information and steal your money, and learn about all the preventative measures you can take to keep your wallet safe.
Just as you wouldn’t leave your physical wallet lying around unattended, a prudent Bitcoin owner will be careful to keep their Bitcoin wallet safe and secure from malicious hackers.
How Secure are Bitcoins?
How safe is the cash in your wallet? Just as with hard currency, like dollars and pounds, the safety of your bitcoins depends on your own vigilance.
If you’re thinking about using Bitcoin, here’s what you need to know.
How to Start Using Bitcoin
- To trade in bitcoin, you must create a ‘wallet’ on your computer or mobile device.
- Put some bitcoin in your wallet, either by purchasing or mining them.
- Each of your bitcoins will be tagged with a unique electronic signature, identifying it as yours.
- When you create a Bitcoin wallet, it will generate your first Bitcoin address.
- You can share your addresses with others so that they can pay you or vice versa.
- Remember, it is good practice for Bitcoin addresses to only be used once.
- Each transaction is then recorded in the Blockchain, a shared public ledger, and confirmed by miners before being processed.
“Victims of credit card theft can cancel a card or reverse fraudulent transactions, but Bitcoin is attractive to thieves because its transactions are irreversible.”
Most bitcoin thefts are the result of inadequate or mismanaged wallet security allowing hackers to steal private keys
1 in 16/17. Number of bitcoins belonging to someone who stole it
$500 million – estimated value of all stolen bitcoin since 2009
Bitcoin wallets can be accessed with a private key – and more and more hackers are out to steal such keys.
140 – Estimate by Dell of current number of viruses specifically-designed to steal bitcoins
$35 – Cost of Predator Pain malware on underground forums, believed to account for one third of all bitcoin theft attempts
>12 of bitcoin exchanges have been hacked – including MtGox, once the biggest (now closed) exchange.
The 51% Hash Attack
With 51% of the overall processing power, someone could control the process by which bitcoins are produced and new transactions are verified and added to the blockchain.
This would allow the individual or group to “double-spend” money that they didn’t have or wasn’t theirs, among other undetected abuses.
In January 2014, the mining pool GHash almost reached critical mass, prompting widespread panic among the Bitcoin community and pleas to leave the pool.
While a crisis was averted, the 51% attack remains a critical flaw in the system.
How to protect your Bitcoin
- Check the vendors you buy BTC from: Where are they registered? What security measures do they apply? Buy from the big regulated exchanges like BTC-e, Bitstamp or Kraken or reputed vendors like Coinbase.
- Never store wallet address and the private key at the same place.
- Only use your own PC or phone for transactions
- Split up your bitcoin holdings between numerous smaller wallets
- Use multiple wallets: web, desktop, mobile and offline
- Back up all your wallet on offline hard drive(s)
- Use wallet encryption – third-party software like TrueCrypt or BestCrypt is ideal for this
- Update online wallet software
- Use Deep Cold Storage = encrypt the wallet file and put it on an offline drive.
- Consider BTC paper wallets stored in a safe
Choosing Your Wallet
Web Wallets – Simplest and most convenient to use, but your private key data is handled by a third party, which can be risky.
Most trusted web wallets: Coinbase, My Wallet(Blockchain), Strongcoin
Desktop Wallets –They doesn’t depend on a third party service – but they can be spied upon by malware. You can only access them on your desktop or laptop. Most trusted desktop wallets: Hive, Bitcoin Core, MultiBit, Armory.
Mobile Wallets – Mobile and easy to use for on-site purchases. But they rely on the internet and cell network – and some of them transfer data through third parties. Most trusted mobile wallets: Mycelium, Blockchain, and Bitcoin wallet
Hardware Wallets – They are the most secure because they are offline. For a comparison, think of them as an offline safe.
Popular Bticoin client with cold storage: Armory
When Bitcoins are stolen, it is theoretically possible to track them as every transaction is public. However, the abilities of sophisticated criminals to systematically launder the proceeds over time makes it extremely difficult to fully-recover them.
In short, keeping bitcoins secure is just like cash; you should always remain vigilant against potential dangers, and take every necessary step to protect it.
- Bitcoin’s Fatal Flaw Was Nearly Exposed – vice.com
- Warning: GHASH.IO Is Nearing 51% – Leave the Pool – cryptocoinnews.com
- Getting Started – weusecoins.com
- Common Bitcoin Misconceptions – millbitcoin.com
- What Is Bitcoin Mining? – bitcoinmining.com
- Total Bitcoins In Circulation – blockchain.info
- Number of Transactions Per Day – blockchain.info
- Frequently Asked Questions – bitcoin.org
- $10: One Perspective On What Bitcoin Will Be Worth In 2014 – forbes.com
- How Thieves Steal Your Bitcoins – pcmag.com
- How to Steal Bitcoin in Three Easy Steps – theverge.com
- Bitcoin Myths – btcsec.com
- $500 Million Worth Of Bitcoin Has Been Stolen Since 2010 – businessinsider.com
- Mind Your Wallet: Why the Underworld Loves Bitcoin – reuters.com
- The Troubling Holes in MtGox’s Account of How It Lost $600 Million in Bitcoins – technologyreview.com
- Missing: Hard Drive Containing Bitcoins Worth £4m in Newport Landfill Site – guardian.com
- Bitcoin wallets: How to protect your digital currency – nakedsecurity.sophos.com
- $116 Millions Bitcoins ‘Found’ At MtGox And How To Protect Your Wallet – forbes.com
- ‘Deep Cold’ Bitcoin Storage to Keep Digital Currency Safe: Report – profit.ndtv.com