Security Problems with Bitcoin

Bitcoins and other cryptocurrencies have cryptography built into their protocol, meaning that they use strong encryption to verify transactions and to guard against cheats trying to manipulate the system.

But there are security issues that you need to be aware of before you starting buying bitcoins.

The protocol may be secure, but not all of the services that deal in bitcoin can be trusted to be secure – or honest.

There have been several high profile security breaches that have resulted in huge amounts of bitcoins being stolen.

In 2013, a bitcoin wallet service called inputs.io was hacked. Using a social engineering attack, hackers gained access to their system and stole 4,100 bitcoins, worth at the time about $1.2 million.

In 2014, bitcoin exchange server Mt. Gox was the largest bitcoin intermediary in the world. Then it announced that approximately 850,000 bitcoins had been lost. While it later managed to retrieve 200,000 of the missing coins, the company went bankrupt and its users were left out of pocket.

In 2016, Hong Kong-based exchange Bitfinex lost about $65m in a cyber-attack.

Bitcoin wallets are also vulnerable. In July 2017 ethereum, the second largest cryptocurrency, was attacked by hackers who exploited a programming flaw in the currency’s wallets to steal the equivalent of $31m.

Be careful when choosing which wallet to use – there are some fraudulent smartphone apps which will siphon your coins out and send them to criminals. Look for wallets provided by companies that have been around for a while.

You need to back your wallet up and store the backup in a safe space. Otherwise, if your wallet only exists on your phone and you lose the phone – you lose the bitcoins.

Whether your wallet is on your desktop computer or your phone, make sure it has a strong password to protect you against thieves. But don’t forget the password or you will permanently lose the coins.

If you’re worried about your wallet being hacked, you could consider using a offline wallet, stored somewhere that is not connected to the internet, or even printing your bitcoins out to turn them into paper coins. These are only useful if you plan to hang onto your bitcoins for a long time.

A compromise is a hardware wallet: a standalone device that stores your bitcoins. They are very secure against hackers, and they can be backed up so if you lose the device you don’t lose the funds.

Spreading your bitcoins around several different wallets is an added security measure. Never keep them all on the same device.

As with any investment you make, you need to beware of scammers. If someone offers you a high return on an investment scheme then it may be a fraud – remember, if it sounds too good to be true, it probably is! An example is a Texan called Trendon T Shavers, who set up Bitcoin Savings and Trust and allegedly raised 700,000 bitcoins by promising investors up to 7% weekly interest. It turned out to be a Ponzi scheme.

Finally, think about a plan for your family in the event of your death. Unlike bank accounts, which can be accessed by the executor of an estate, if nobody knows the location of your bitcoin wallets or the passwords needed to access them, the funds won’t get passed onto your family. Lodging the details with the solicitor who handles your testament prevents that loss.