Crypto means hidden, or secret. When you apply that to money, it has a certain sort of appeal, doesn’t it? Well, have you heard about cryptocurrencies yet? If not, here’s my favorite definition from Investopedia. Cryptocurrency is “a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature.” A key feature of a cryptocurrency is that it is not issued by any central authority, rendering it (in theory) immune to government interference or manipulation. Plus, the anonymous nature of cryptocurrency transactions makes them well-suited to defend against activities such as money laundering and tax evasion. The first cryptocurrency was Bitcoin, but its success has brought on a number of competing cryptocurrencies such as Litecoin, Namecoin and PPCoin.
Are cryptocurrencies the future of money, as many are saying? Probably so, but I’ve been wondering if they are as secure as we are hearing? Since Bitcoin was the first cryptocurrency created and the most widely accepted around the world, I did a bit of research on the pros and cons to find out just how secure Bitcoin, and other cryptocurrencies really are. Here is what I found out:
According to Bitcoin.org, the semi-official voice of the Bitcoin community, “the whole system is protected by heavily peer-reviewed cryptographic algorithms like those used for online banking. No organization or individual can control Bitcoin, and the network remains secure even if not all of its users can be trusted.” These are strong words and may lead one to believe that there’s no way anything can happen to their money.
However, dozens of robberies of Bitcoin banks and exchanges have been reported, resulting in the loss of millions of dollars. There’s a site that has even recorded several Bitcoin ‘heists’ in the past: https://bitcointalk.org/index.php?topic=576337. I read one report of a user whose Bitcoin fortune rose to half a million dollars in a short amount of time, “And then disaster struck. “I just woke up to see a very large chunk of my bitcoin balance gone,” he wrote. “Needless to say I feel like I have lost faith in bitcoin.” He speculated that a Windows security flaw may have allowed the culprit to gain access to his digital wallet.” How can this happen?
Well, Bitcoin is vulnerable in the same way any other online asset is vulnerable: Passwords can be stolen or guessed and accounts can be hacked. In fact, most Bitcoin thefts involve hacking into users’ accounts. In fact, Bitcoin defenders say this is exactly the point. Bitcoin itself is secure but what isn’t is you! According to Bitcoin.org: “Although these events are unfortunate, none of them involve Bitcoin itself being hacked, nor imply inherent flaws in Bitcoin; just like a bank robbery doesn’t mean that the dollar is compromised. However, it is accurate to say that a complete set of good practices and intuitive security solutions is needed to give users better protection of their money, and to reduce the general risk of theft and loss.”
So what is really meant when saying Bitcoin and other cryptocurrencies are secure is that they cannot be copied or faked, like counterfeit bills. Anyone receiving a Bitcoin can be confident that it is real and valuable. However, once a Bitcoin transaction has been approved by both sides, it cannot be reversed without the permission of the recipient. So when hackers engineer the transaction, the cash is gone forever.
After my research, it is clear that even cryptocurrencies aren’t necessarily ‘hidden or secret’ as their name touts. And whether it’s paper or digital money, it probably goes back to developing a set of good practices and intuitive security solutions to help better protect your money. But that’s a blog topic for another day!