Bitcoin Heists Test Currency’s LegitimacyBy: Brian Powell - February 25, 2014
In startling news Tuesday morning, one of the world’s largest bitcoin exchanges, Mt. Gox, ceased existing, leaving millions of dollars worth of bitcoins unaccounted for.
The Tokyo-based exchange company has stated that a security leak that has been present since September has violated the integrity of some 700,000 accounts, totaling approximately $350 million in stolen currency. Due to this huge loss of bitcoins, the value of the cyber-currency has plummeted drastically in the last 2 hours, losing nearly 20% of its value on the open-market.
In order to save some legitimacy and ethos for the currency, 6 of the world’s leading bitcoin exchanges have released a statement claiming that the heist was a result of negligent actions of Mt. Gox and is not representative of an inherent security flaw in the digital currency itself:
“This tragic violation of the trust of users of Mt.Gox was the result of one company’s abhorrent actions and does not reflect the resilience or value of bitcoin and the digital currency industry. There are hundreds of trustworthy and responsible companies involved in bitcoin. These companies will continue to build the future of money by making bitcoin more secure and easy to use for consumers and merchants. As with any new industry, there are certain bad actors that need to be weeded out, and that is what we are seeing today… We are confident, however, that strong Bitcoin companies, led by highly competent teams and backed by credible investors, will continue to thrive, and to fulfill the promise that bitcoin offers as the future of payment in the Internet age.”
The Mt. Gox incident is simply the most recent scandal bitcoins have faced over the past year. Earlier this month, another heist was uncovered which involved the use of a “Pony” botnet to steal the account information for 700,000 accounts. The information from these accounts allowed hackers access to 85 private wallets with a total of approximately $220,000. A botnet is a form of Trojan malware which infects thousands of host computers, which then take commands from a central computer.
The goal of these computers is to hack into the private information owners have stored, granting the hackers access to the private key numbers which are used to access the virtual wallets bitcoins in which bitcoins are stored. Ziv Mador, security research director with Trustwave, stated that “It is the first time we saw such a widespread presence of this type of malware. It was on hundreds of thousands of machines.”
While this may have been the first time malware has been used on such a scale to steal bitcoins, it is not the first time bitcoins have been stolen by hackers. Last year, in fact, over $1 million in bitcoins were stolen by hackers who were able to reset an exchange site’s password through an email recovery scheme.
These latest large-scale bitcoin heists, added to the two Silk Road busts which have occurred so far, make many question whether or not bitcoins are a viable form of currency. Campbell Harvey, a professor at the Duke University who specializes in financial markets and global risk management, believes that the recent news coming from Mt. Gox “reminds us of the downside of decentralized, unregulated currencies. There is no Federal Reserve or IMF to come to the rescue. There is no deposit insurance.” However, he goes on to add that this “doesn’t mean the end of the road” for bitcoins as “increasingly sophisticated investors” will seek solutions which “raise both quality and confidence” of bitcoin exchanges.
While Harvey may be optimistic, those at Mt. Gox are not. In a leaked “Crisis Strategy Draft” plan, executives at Mt. Gox state, “The reality is that MtGox can go bankrupt at any moment, and certainly deserves to as a company. However, with Bitcoin/crypto just recently gaining acceptance in the public eye, the likely damage in public perception to this class of technology could put it back 5~10 years, and cause governments to react swiftly and harshly. At the risk of appearing hyperbolic, this could be the end of Bitcoin, at least for most of the public.”
Until the world knows the answer to whether or not bitcoins are a secure investment or not, one of two actions should be taken: 1) Either store bitcoins in an offline wallet; or 2) Cash those puppies in and don’t look back. Considering the wildly fluctuating value of the currency and the increased security-risks of late, option two is looking better and better everyday.
Image via Wikimedia Commons