Bitcoin’s unhackable. Bitcoin banks? Not so.

Aug 3, 2016
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 sticker on the window of a local pub indicates the acceptance of Bitcoins for payment. Sean Gallup/Getty Images

Bitcoin’s unhackable. Bitcoin banks? Not so.

Aug 3, 2016
 sticker on the window of a local pub indicates the acceptance of Bitcoins for payment. Sean Gallup/Getty Images
HTML EMBED:
COPY

There was a major heist today worth at one point $77 million. No guns, no getaway cars, though, it was all done digitally.  In fact, there were no dollars either, it was a theft of digital currency: Bitcoin.  Thieves hacked into a bitcoin exchange based in Hong Kong called Bitfinex — a bitcoin exchange is kind of like a bank and a trading floor all wrapped up into one —and stole the currency. 

This has happened dozens of times, but this incident was pretty big.  The value of bitcoin plummeted by 25 percent from $650 per bitcoin to $480 before recovering to around $560. 

Bitcoin, the actual digital currency, has, in fact, never been hacked.  Nobody has been able to hack the actual code that a bitcoin is actually made of in order to forge or steal it.  What have been hacked, however, are the bitcoin exchanges that hold it.   

“Bitcoin is like gold, someone can come and steal it,” said Rupert Goodwins, a technology journalist in the U.K. 

A bitcoin does have a record of its movement, from bitcoin wallet to bitcoin wallet, “but it doesn’t tell you anything at all about who controls that wallet,” he said.   The same attribute that makes bitcoin so highly prized – its anonymity – is the same thing that makes it so easily stealable.

That vulnerability is stressor number one for Jaron Lukasiewicz, former CEO of the bitcoin exchange Coinsetter.  He sold the company this year and now is moving on to opportunities outside bitcoins.  “The biggest reason for that, really, is the stress involved with running a bitcoin exchange,” he said. “These hacks are really a huge issue the entire time you’re running a company like this.”

His company was never hacked, luckily, “but there were definitely a few days where I had scares.”

Lukasiewicz avoided hacks by, among other things, keeping people’s bitcoins in “cold storage” – in locations not connected to the internet and therefore not hackable. Ironically, he said, Bitfinex was trying a strategy that was more technologically advanced but proved to have security vulnerabilities.

“I feel really sorry for the management, this must be one of the worst days of their life,” he said.

Banks in the real world also get robbed, and they get hacked as well. “But what our banking system does have is insurance for the banks in case of catastrophe,” said Gil Luria, director of research at Wedbush Securities. For example, the government guarantees a certain amount of bank deposits through the FDIC. “In this emerging bitcoin economy there is no such equivalent.”

There are experiments with individual insurance policies for bitcoin exchanges, he said, but it’s not systemwide. 

“Bitcoin can get lost, do get lost, and will continue to get lost,” Luria said, “unless consumers go to the exchanges that are insured or more reliable or more robust and more secure.”

Bitcoin buyer, beware. 

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