When Bitcoin was still a relative newcomer on the global financial market, it was understandable that many consumers were concerned that this decentralized currency could have been used for nefarious purposes. While Bitcoin has been around for over a decade, there remain a variety of misconceptions around the use of this well-established cryptocurrency. This article will offer some insight into the contentious subject of whether or not Bitcoin is really safe to use.
For those who don’t have time for a long-form answer, the short answer to the question “is Bitcoin safe to use?” is “yes.” Bitcoin features plenty of security and has been further legitimized by the addition of various internal and external regulations. However, just as would be the case with a wire transfer or another more conventional form of online payment, it is important to note that ensuring the safety of their critical personal data and cryptocurrency still requires that users take active steps to protect themselves.
What Are the Risks?
While Bitcoin’s proponents tout it as a safe and secure way to pay for goods and services, the reality is that it is no safer than any other payment method. In fact, some consider it to be less safe for those who don’t know what they’re doing. That’s because unlike other routine financial transactions, no centralized regulatory body keeps track of Bitcoin transactions. Instead, the investor has almost total control.
The primary risks when using Bitcoin, beyond those caused by human error such as falling for scams and investing at the wrong time, are cybersecurity threats, insecure storage solutions, and the use of insecure third-party platforms. Thankfully, the majority of these potential risks can be controlled for by Bitcoin investors, themselves.
Bitcoin hackers focus on compromising the security of Bitcoin keys. These keys function like secret passwords that give holders of Bitcoin access tot heir own funds without allowing them to be transferred by any third-party who has not received proper authorization, in this case, cybercriminals. If a hacker manages to compromise a Bitcoin key, it allows them to send the Bitcoin to themselves or to another party or even to just eliminate the key, and thus the Bitcoin, altogether.
The best-known instance of a Bitcoin cybersecurity breach occurred in 2014 when a data breach at the Mt. Gox exchange led to the loss of $450 million worth of Bitcoin. Some, though not all, of those losses occurred through the compromise of investor’s Bitcoin keys and wallets. Given that at the time, the platform processed nearly three-fourths of all Bitcoin transactions, this data breach truly sent the international Bitcoin investment community reeling.
All serious Bitcoin traders and investors should take adequate measures to ensure the security of their private keys. They should make a point of using a reputable exchange and should note that today’s most well-known exchanges offer more effective protocols than those that were exploited in the Mt. Vox breach.
It is also wise to use a virtual private network (VPN) while trading. This solution doesn’t just protect Bitcoin keys. It actually prevents cybercriminals from even seeing that a cryptocurrency wallet is present on the device, to begin with. This, in turn, helps to ensure that the device will not be targeted.
Without a VPN, traders become easy targets for cryptocurrency theft and even physical identity theft. Hackers gain access to their wallets by viewing and logging transaction, then use that data together with social media details and other personal identifying information to connect to the user’s cryptocurrency wallet. From there, they can simply transfer any Bitcoins being held in the wallet to their own accounts.
A second serious threat to Bitcoin security comes in the form of potential storage issues. Although examples like that above in which the majority of the cryptocurrency losses took place in the form of hacked Bitcoin keys, users’ wallets were also compromised in the Mt. Vox breach.
One interesting example of cryptocurrency wallet hacking can be seen in the exploitation of vulnerable code in one of Bitcoin’s main competitors, Ethereum. During this attack, hackers managed to reset users’ wallets and reassign ownership of the cryptocurrency that they held to their own wallets. In this case, they did not even need access to their keys.
Thankfully, Bitcoin’s security protocols are more air-tight than this more recent arrival to the cryptocurrency scene. Attacks on Bitcoin wallets are almost universally aimed at wallet developers, instead. This makes it easier for Bitcoin investors and traders to protect themselves.
Aside from choosing a well-established and secure wallet developer, the best thing that traders and investors can do to protect their wallets is to separate them. They should create one “hot wallet” for daily trading and transfers and a second, “cold wallet” for long-term storage. The cold wallet should be stored on a device that is not connected to the internet and should never be accessed directly on that device.
One good way to protect Bitcoin keys both during transactions and while the Bitcoins are in storage is to purchase a specialized hardware device like the Trezor. Created by SatoshiLabs, this device is just one of the most popular of various USB Bitcoin store solutions available on today’s markets. All of them share the same function, though, in that they are all designed to store cryptocurrencies securely without making them unnecessarily difficult to access for those who have a legitimate right to their contents.
While instances of hackers stealing Bitcoin from individual consumers are actually less rare than some media outlets would have cryptocurrency enthusiasts think, the reality is that scams surrounding Bitcoin abound on social media and the internet, more generally. No amount of technological development will be able to prevent the loss of funds due to falling prey to scams, either. What can help is for would-be investors and traders to familiarize themselves with the most common scams prior to converting any serious amount of money into Bitcoins.
Phishing involves the impersonation of a brand, company, or individual in an effort to trick consumers into giving up their own personal financial information voluntarily. In the context of Bitcoin scams, phishing usually involves the establishment of a website that pretends to offer a search service that claims to evaluate the security of a user’s private Bitcoin key for signs of vulnerability. What actually happens when the user inputs his or her key is that the scammer will be able to spend that Bitcoin him- or herself directly from its owner’s wallet.
Bitcoin flipping scams are not as common as phishing scams, but they rely on a similar amount of goodwill and trust. These scams offer unreasonably high returns on investment after users pay a startup fee and are often found on social media sites like Facebook. Of course, once the users pay the supposed start-up fee out of their own crypto wallets, the Bitcoins are simply stolen and the scammers are never heard from again.
Bitcoin Pyramid Schemes
Unfortunately, pyramid schemes can be more difficult to detect than those described above. However, the end result of falling prey to a pyramid scheme is the same.
Pyramid schemes work by enticing investors into a high-yield program that features multi-level marketing requiring each investor to sign up additional members. It sometimes appears at first as if the investment strategy is legitimate, but only until the original scammer has made a sufficient amount of money. At this point, he or she will leave the “company” and the pyramid will collapse.
The best way to avoid becoming involved in pyramid schemes is to very carefully investigate any supposed opportunities that come up requiring users to put in an initial investment of their own Bitcoins. While it’s true that there are plenty of legitimate companies that cater to small-scale investors, the difference between these and pyramid schemes generally becomes obvious after just a little bit of research into the company’s past.
The Bottom Line
The blockchain technology that underlies Bitcoin and other popular cryptocurrencies is sound and the security protocols used by Bitcoin, in particular, have yet to be penetrated. There is nothing fundamentally unsafe about either investing in Bitcoin or using it as a payment method. However, it is still possible to fall prey to hackers, especially for those who are not familiar with cryptocurrencies and the various steps that must be taken to ensure the security of cryptocurrency transactions.
There is no way to say what the future might hold in terms of potential vulnerabilities, but today’s Bitcoin traders are at no more inherent risk than traditional traders or even holders of ordinary bank accounts. The primary difference is only that the anonymity of cryptocurrencies and their decentralized nature often lulls traders and investors into a false sense of security that encourages them to fall prey to cybercriminals. Taking advantage of the technologies discussed above can go a long way toward preventing attacks, although avoiding scams is and likely always will be the responsibility of individual Bitcoin traders.