Bitcoin right now is the most successful cryptocurrency out there with more than 15,000,000 bitcoins worth over 6.8 billion US dollars. The only question is how bitcoin can secure its network when anyone is welcome. There have been many breaches in bitcoins security, especially in the large exchanges since it has become very popular and the technology is relatively new.
One problem with bitcoins security is that the communications are not encrypted, which means that a hacker could intercept communications between users on a network. The bitcoin network is run is through a large public dataset called a blockchain where each individual transaction is a block and as each block enters the system it will send a signal to the “peer-to-peer computer network” of users for verification. In each of these blocks, there is a cryptographic hash of the one that came before it, which lets it know its place in the chain. This verification will prevent hackers from stealing and double spending the bitcoin, while also helping users trust the system. Due to Bitcoins lack of central authority, it is imperative the users feel secure since it is the user’s machines that generate the bitcoins using a very complicated procedure called Bitcoin mining.
Once a user has a bitcoin though they now need to store it in the bitcoin wallet, however, there are three different way to do this. The first is as a Full Client, which is more for experienced users since they have to control the transactions from beginning to end on their own with no help from a third party. Next would be a lightweight client, which would store the bitcoins, but does need a third party server to access the network and make the transaction. Lastly, there is the web client, which would rely completely on a third party server to access the network and make all the transactions.
The way bitcoins security works are when one first install the bitcoin wallet it generates a public and private key pair for the user, then it will hash the public key to form the user’s personal bitcoin address. In order to buy Bitcoin, a user must send their bitcoin address to the person who wants to buy it. There are multiple ways of doing this, but the most popular are either email or just putting the address on a public webpage. It might not seem safe to do this, but because the address is just a hash of the public key it is secure. Once a user receives a key they scan it on the device they are using and decode it. At the same time the seller’s transaction is sent out to all the other nodes on the blockchain, then through a process call mining, the process can be verified.
Mining is the process of keeping the Bitcoin transactions secure by adding new blocks/transactions to the chain. The blocks are taken off as each transaction is complete and the bitcoins are exchanged. The miners also generate new bitcoins so they can solve cryptographic problems, but the hard part is there can only be 21 million bitcoins in circulation by the year 2040.
Bitcoin is run by clients that own the blockchain and share transactions across the network. When a client does this they are considered a node or a full client, these clients make up the entire bitcoin network and are the target for most hacks. As far as Network-level hacks are concerned there are two general phases: first, the hacker must intercept the bitcoin traffic by manipulating the routing and then messing with the bitcoin messages by dropping them, modifying them, or delaying them.
However, the most common bitcoin hacks are just because of clients not managing their wallets properly thus allowing hackers to steal their private keys. If a hacker can get a client’s private key they can have full access to their bitcoin wallets so they can then steal the bitcoins. Since 2009 over $500 million of bitcoin has been stolen. This is just becoming a growing problem since hackers have learned to target the private keys.
Another why clients can make themselves vulnerable to attacks is by keeping their bitcoins in an exchange long term. Since large exchanges are popular targets for hackers because they are designed to only keep bitcoins for trading and not for protecting them long term. The exchanges are connected to the internet while the wallets, what clients should be keeping their bitcoins in are offline so they are impossible to access without a private key.
Some ways that clients can protect their Bitcoins are: never keeping the wallet address and the private key in the same place, using Deep Cold Storage, and splitting up the bitcoins into multiple wallets while also using encryption. When clients keep their wallet address in the same place as their private key, because if a hacker can get into the client’s wallet then they can see their private keys. The deep Cold Storage is making sure clients use an encrypted wallet file then making sure it is offline; to make it even more secure it’s useful to have the Bitcoins split between numerous deep cold wallets.
One of the biggest hacks on bitcoin was during a Tokyo based cryptocurrency exchange that was hacked and hundreds of millions of dollars’ worth of bitcoin was stolen. This was not only the biggest hack of bitcoin but of cryptocurrencies as a whole. After the hack coin check came out and said that they had not used adequate measures to store the cryptocurrency that was stolen.
In conclusion, Bitcoin is an effective method of currency and is relatively secure as long as clients know what the proper steps of securing their Bitcoin are. The technology for securing bitcoin is still young so there is definitely room to improve the security of large exchanges and online wallets.