We live in an age of high-profile data breaches and identity thefts. Take, for example, the data breach at Target in 2013 that affected 41 million customers. Target settled for $18.5 million to settle the case. Bitcoin was designed to not be susceptible to data breaches. The blockchain technology and peer-to-peer network function as a built-in audit system that prevents hackers from being able to access sensitive information. However, not a few Bitcoin companies have suffered data breaches, which leads to the question of whether Bitcoin actually is secure.
Mt. Gox and Other Data Breaches
Mt. Gox was a Bitcoin exchange launched in the summer of 2010 when its creator, Jed McCaleb, realized the need for an online service to buy, sell, and store Bitcoin. The name “Mt. Gox” came from the name of the card game Magic: The Gathering. In 2011, he sold the website to Mark Karpeles, a French investor. That summer saw a couple of security breaches that sharply affected the value of the still wildly fluctuating Bitcoin. However, by 2014, Mt. Gox was handling 70% of the world’s Bitcoin transactions.
In February of that year, all Bitcoin withdrawals were halted as the Mt. Gox administration became aware of a massive data breach that had been occurring for over a year. They discovered that a bug in the source code had allowed a hacker to steal hundreds of thousands of dollars worth of Bitcoin. Transactions slowed to a halt, the site went offline, and the company quickly collapsed. Some thought that the collapse of Mt. Gox meant the end of Bitcoin. The total cost of the failure was near $500 million. Today, the Bitcoin exchange Kraken is entrusted with managing the accounts of those who lost money in the Mt. Gox catastrophe.
While the collapse of Mt. Gox was a colossal Bitcoin catastrophe, it was not the only company that failed due to a security breach. The trading platform Bitcoinica was hacked in March 2012; the hack was so severe that Bitcoinica’s reserves could only compensate customers 50% of what their holdings had been. In January 2015, hackers broke into the BitStamp server and made away with 19,000 Bitcoins, worth over five million dollars. Unlike Mt. Gox, the administration of BitStamp immediately notified its customers of the theft and used its own reserves to pay back its customers. Clearly, maintaining security in Bitcoin wallets and exchanges is no small task. However, the wallets and exchanges that were hacked are not the same as the actual Bitcoin network.
Can Bitcoin Be Hacked?
Blockchain technology provides an inherently high degree of security. Hacking into the Bitcoin network would require the simultaneous collision of thousands of node operators. While the chance of this happening is certainly not nil, it is extremely unlikely. Further, the process of mining Bitcoins provides an added layer of security to each transaction.
The challenge lies in finding a Bitcoin exchange and wallet that is secure enough as to be impenetrable to data breaches. To that end, Bitcoin users should be aware of different types of wallets. A thin wallet is a Bitcoin wallet that does not operate on the full peer-to-peer network. Rather, it uses a single server and a method known as Simple Payment Verification. Thin wallets are vastly more energy efficient; this is significant because one of the challenges associated with Bitcoin is the vast amount of energy that it consumes. In fact, by the beginning of the next decade, estimates project that the entire Bitcoin network will be using as much or more energy than the entire nation of Denmark! However, a thin wallet substitutes its gains in energy efficiency for losses in the inherent security features of blockchain. This is because it does not connect to every node on the blockchain to verify transactions.
A hot wallet is a wallet that is online and connected to the Internet. This feature enables payments and withdrawals to be made instantly because they are immediately broadcast on the peer-to-peer network; therefore, they are commonly used by individuals who want to make a large number of exchanges. A hot wallet can be likened to carrying cash to make purchases. However, hot wallets can be vastly more prone to security breaches. In fact, most of the biggest security breaches in Bitcoin history involved a hot wallet.
Cold storage refers to Bitcoins that are being preserved as an investment commodity rather than being held for frequent spending and purchases. Cold storage Bitcoins are kept offline; this is a high-security measure that makes hacking significantly more difficult. Wallets that utilize cold storage keep the vast majority of their Bitcoin reserves offline. Therefore, in the event of a security breach, most of the Bitcoins being held by the wallet will not be affected. Bitcoins in cold storage may be kept on a USB drive or in an offline database and backed up with a printed QR code on a piece of paper. You can also scan this QR code using the QR Scanner app.
A desktop wallet is downloaded to a user’s desktop so that the Bitcoins are held on the person’s computer rather than in a wallet service. While this may seem like a good practice, security measures will have to be implemented on the individual’s computer to ensure that the wallet won’t be hacked. Some Bitcoin wallets operate by keeping users’ Bitcoins in a desktop wallet; while this may be a protection against hackers, users need to have a high degree of trust in the company that the company will not steal their Bitcoins.
Other types of wallets include mobile wallets, physical wallets, online web wallets, and hardware wallets. To ensure that your Bitcoins stay safe from hackers, do extensive research on what kind of wallet will best meet your needs while providing the highest level of security possible.
