Second Bitcoin Hack Highlights Challenges, Resilience of Anarchic E-Currency
September 25, 2012 8:02 PM
comment(s) - last by
(Source: Zach Copley)
Hack occurred due to exchange operator leaving his keys unencrypted
Originally conceived of by science fiction writers -- most notably Neal Stephenson's cult science-fiction novel
-- peer-to-peer cryptocurrency has been all over the headlines, following its leap to the real world, in the form of
. Created by a shadowy individual known as "
", bitcoins are an inherently anarchic construct looking to free a key piece of the global economy -- specifically, currency -- from the grip of any one nation. They're also difficult to trace, making them a popular mode of purchasing quasi-legal items.
But over the year the flowers and sunshine surrounding Bitcoin has been slightly diminished. Last June, there was
a massive devaluation
, letting off inflationary steam and costing late adopters large amounts of real-world dollar value. Later that same month Mt. Gox, the single largest Bitcoin exchange (which trades Bitcoins for real world dollars and vice versa)
. Since then we've learned about
Bitcoin Ponzi schemes
, a second exchange
has been hacked
, with approximately $250,000 USD in Bitcoins stolen (or more correctly, inappropriately transferred to a single account).
London-based BitFloor founder Roman Shtylman reported the theft to the U.S. Federal Bureau of Investigation (despite their anarchic nature, Bitcoins can be considered personal property and are arguably "illegal" to seize via hacking). He's also reopened the exchange, though his volume is down substantially placing his site as the thirteenth largest exchange globally.
So how did the hack happen?
Unlike some other exchange hacks, which saw password cracking used to access individual accounts and place trades (as with the Mt. Gox hack), the BitFloor hack occurred by a direct hack on the person that holds all the Bitcoins as per the standard exchange model -- in this case Mr. Shtylman. By obtaining Mr. Shtylman's private keys -- which he foolishly left unencrypted -- the hacker was able to divert the funds flowing into his exchange into his own account, gaining 24,000 Bitcoins.
Mr. Shtylman now says he's keeping his new keys in "cold storage" (offline computers) to prevent future hacks.
The hack cost the exchange operator all of the revenue he collected off of trading fees -- and then some. But he vows to pay back the victims, commenting, "How long that will take I don’t know. Certainly for me this is a long-term plan, and Im mostly doing this because I feel it's important to try and be clear of my intention to try and recover the coins."
BitFloor was closed for almost a month, following the hack. [Image Source: Bitcoin Charts]
One possibility would be to catch the thief.
The person who grabbed the coins has not transferred them since the theft. As all Bitcoin transactions are logged, if and when they do begin to make trades that information could be used in an effort to track them down -- say by looking at the IP address making the trade. Mr. Shtylman would likely work with other exchange operators to monitor trades in the hunt for the thief.
For now, though, some more folks have lost their hard earned cash to the world of Bitcoin. The lesson is that as grim as today's corruption prone offline economy is, digital anarchy isn't entirely danger free either.
Advice: don't keep all your bitcoins in one basket. [Image Source: Sophie Books Photography]
About the best advice for Bitcoin investors is similar to advice to real-world traders -- don't keep all your eggs in one basket.
This article is over a month old, voting and posting comments is disabled
9/27/2012 8:00:20 AM
Digital currencies are worthless?
Aren't all currencies worthless?
Or do you really believe that bit of paper and those coins are actually worth anything?
As for the rest, it's all digital anyway.
9/27/2012 10:03:29 PM
The format of the currency is irrelevant. For a currency to have value it has to be tied to a REAL economy, and an economy needs two basic things to exist - providers and consumers.
Providers make goods, services and resources available while consumers use the goods, services and resources. The currency that both parties agree upon has an intrinsic value related to the supply and demand of the particular economy that both parties are members of - this is where bitcoins fail.
Since bitcoins are not tied to any one economy their value is entirely arbitrary and inconsistent. The exchange rate of a country's currency are based on relative buying power, and buying power is a factor of a country's economic output. Bitcoin value is determined by the exchanges themselves - which creates an atmosphere where the largest coin exchange gets to control the overall value of the currency.
If you compare bitcoins to another digital currency like World of Warcraft gold, you can see that the value of WoW gold is tied to the particular economy within the fictitious game world.
For something like bitcoins to work, the entire world would need to have a single unified economy where everything costs the same throughout the world. This socialist wet dream will never happen.
9/28/2012 2:10:19 PM
The black market is a very real economy and the way i see it bitcoins are very much tied to this economy. This is also the reason that i think it will prevail for the time being. However i suspect that future legislation will put an end to bitcoins, eventually... I'm having difficulty understanding how a currency like that could be legal in the first place.
"We can't expect users to use common sense. That would eliminate the need for all sorts of legislation, committees, oversight and lawyers." -- Christopher Jennings
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