Bitcoin isn't mainstream, and it may never be. And yet it would be unwise to ignore it. Some $14.9 billion worth of bitcoins were in circulation in January 2017, and blockchain, the technology underpinning bitcoin, has attracted plenty of attention for its disruptive potential in banking, trading, and even media. So how safe is bitcoin?
The Risky Currency
Bitcoin does carry some unique risks. The value of the cryptocurrency has been three times as volatile as the price of oil and 11 times more than the post-Brexit exchange rate between the dollar and the British pound, according to European Tech analysts from Credit Suisse's Global Markets Research Department. Bitcoin transfers are also irreversible, so those who inadvertently enter an extra digit when trying to pay for something are out of luck. Finally, users need a private key to access their bitcoins, and that key operates like a password that cannot be reset. If the private key is lost or stolen, so are the bitcoins that go with it.
The Immune Structure of Blockchain
The blockchain architecture itself appears somewhat immune to hacking risks – it's not an interconnected series of individual accounts that have a certain amount of assets sitting in them, but rather a record of all past transactions. When someone wants to transfer bitcoins to someone else, all computers running bitcoin software process the sender's public signature through an algorithm and checks the past transactions encoded in the blockchain to ensure the sender owns the bitcoins they say they do. Other computers then check and verify the recipient's work. After that, the transaction is aggregated with other transactions, and computers running core bitcoin software, known as miners, race to solve a complex mathematical puzzle to verify the legitimacy of the block of transactions. One computer wins the race, and the other miners verify the accuracy of the solution. Once they agree the transactions in a block are valid, the computer that won the race is issued newly minted bitcoins – thus increasing the total supply of the currency – and a new block gets added to the immutable ledger.
It's only when you add people to the mix that things start to get complicated.
A Challenge for Hackers?
Could someone hack into the blockchain and alter the record to make it look as though previous bitcoin transactions had transferred money to the hacker's account? In theory, yes – but it would require considerable computing power. Bitcoin users verify the validity of a transaction by looking at all past transactions, so a computer would not only have to solve the mathematical puzzle associated with a particular block to manipulate it, but also with the blocks that come after it. Credit Suisse compares the blockchain to layers in a geological formation. The recent blocks are "soft soil." With enough computing power, a bad actor could theoretically do the work required to manipulate those blocks. That's why transactions are only considered valid when they are six blocks deep in the chain. The deeper into the blockchain one goes, the more computing power it would take to alter records.
A 51 Percent Attack
Concentrated share among bitcoin miners also presents a potential risk. Theoretically, if a single party gained control over 51 percent of the network, it could prevent legitimate new transactions from settling or undo recent confirmations, potentially allowing it to spend the same bitcoins more than once. (With 30 percent of the network, Credit Suisse calculates a malevolent actor has a 40 percent chance of mining six consecutive blocks in a week, allowing them to tamper with transactions in the "soft soil.") In the event of a so-called 51 percent attack, however, Credit Suisse predicts the value of bitcoin would plummet. In other words, the miners attacking the network would also attack the value of the very assets they were stealing, not to mention the assets they already own. To acquire 30 percent of the network, bad actors would also have had to mine blocks in the past, meaning they have a stake in keeping the ledger intact – and honest.
Cyber Theft of Cryptocurrency
While the distributed design of blockchain defends the architecture from direct hacks, most bitcoin users do not interact directly with the blockchain. Instead, they interact via intermediaries. Most workaday users depend on online exchanges that allow users to exchange fiat currency for bitcoin and digital wallets that facilitate payments. and both elements of the bitcoin ecosystem have been subject to high-profile cyberattacks. In August 2016, hackers stole 119,756 bitcoins, worth $82 million in early November, on deposit with the Bitfinex exchange.
For pure spectacle, nothing beats the implosion of the erstwhile premier bitcoin exchange, Mt. Gox. In 2014, the exchange filed for bankruptcy, saying hackers had stolen 850,000 bitcoins, worth some $590 million in mid-November. Only 24 percent of those coins have been recovered, and Japanese prosecutors have charged ex-CEO Mark Karpeles with embezzlement. Multiple in-depth reports since the incident have described unorthodox management practices at the company.
In short: Blockchain technology is relatively safe. In the absence of bad actors, trading in bitcoin is too. It's only when you add people to the mix that things start to get complicated. But that is true about everything.
Credit : Ashley Kindergan