As global commerce increases, some say Bitcoin has the potential to play a large role in revolutionising how people pay for their goods.
However, just like any other crypto-currency, there have also been reports of numerous scams, hacks, thefts, defunct “stock exchanges” and lost wallets of huge financial value, which has led to a number of concerns being raised about just how safe this e-currency is. Therefore, in order to take full advantage of the flexibility and cost-saving benefits Bitcoin offers, there are a number of security challenges that need to be addressed.
Firstly, let's look at what Bitcoin is and how it works. Bitcoin is essentially a decentralised digital currency which is based on an open-source, peer-to-peer Internet Protocol. While it isn't linked to real money, it is traded on various electronic exchanges, which establishes its value.
A Bitcoin wallet (BTC) is basically just like a real wallet filled with cash, which means if it is lost or stolen, there are often large sums of money at stake. One of the most notable BTC losses is the Bitomat.pl loss. During a routine maintenance restart, the server that hosted its Bitcoin wallet was unknowingly configured so that it was irretrievably destroyed when shut down. This resulted in the loss of 17,000 BTC (about $14.5 million at today's value).
So far there is no air tight solution for those wanting to keep their BTC safe and secure. With the unregulated, decentralised BTC market still in its infancy, and each coin worth such a significant amount of money, it creates the perfect opportunity for bad actors to try and exploit it in any way possible. Fortunately for the Bitcoin miners, the Bitcoin protocol is built in such a robust fashion that there haven't been any reported exploits against the Bitcoin protocol itself. This narrows down the threat vectors to scams, hacks, and user negligence.
One notable scam is the Ubitex scam. Ubitex was the first company to be listed on the now-defunct GLBSE “stock exchange”. The firm's business model was simple – provide the service to let anyone buy and sell BTCs for cash by charging a small fee. It sounds like a good idea; until the founder disappeared with the BTCs (the company had raised 1,100 at that point).
So what needs to be done to better secure Bitcoin? First and foremost, secure wallet software needs to be created which automatically keeps your BTCs safe while also making access to your wallet user-friendly. The wallet must also include multi-factor authentication that requires transactions to have a signature from more than one private key in order to spend the BTC. This adds different layers of protection, as something like this would require a thief to compromise not just your wallet, but all of the private keys as well.
Once a secure method of storing your BTCs is in place, all that is left is the due diligence of the user.
With no standards or regulations in place, cyber criminals are more easily able to avoid law enforcement when using or stealing Bitcoins, therefore doing your homework on the company or services you plan to spend your BTCs on is key. In addition, to better protect your wallet from loss or theft, BTC wallets should not only be backed up and encrypted, but copied and stored in more than one location. And finally, as Bitcoin's value increases, users would be well advised to follow one golden rule – never keep all of your Bitcoins in the same wallet.
Over the past year, the level of hype around Bitcoin has grown, and it's likely this buzz will only continue throughout 2014. With a single Bitcoin recently peaking at $1,240, the long-term promise of this currency is big – and it's only matter of time before cyber criminals find a way to exploit this.