There’s been a lot of high-profile news lately about huge bitcoin heists, exchanges closing down, people’s wallets being hacked – makes getting into the world of Bitcoin sound pretty scary doesn’t it? On top of the Mt. Gox debacle, TWO more exchanges announced thefts today:
Flexcoin announced they had 896 BTC stolen and will be closing down immediately, as they don’t have the resources to recover from the loss.
Poloniex, who has had previous thefts, said cryptocurrency trading is shut down for the moment because of stolen BTC.
If I didn’t know anything about Bitcoin I wouldn’t touch it with a 100-foot pole.
I thought Bitcoin couldn’t be hacked?
A key thing to understand here is that Bitcoin itself is not to blame. Nobody has cracked Bitcoin itself (and used it properly, it is impossible to steal your funds). The problem lies with the services that are being built on top of the Bitcoin system.
When data is stored online without proper security measures, it is vulnerable to attacks like these. A direct analogy can be made to physical banks and cash – there was a day when it was relatively easy to walk into a bank with a gun and a mask, steal mass amounts of cash, and gallop away on your horse. You don’t blame the cash for the theft, you blame the security measures that the banks had in place. Security measures have gotten better and better – how often do you hear about banks getting knocked off nowadays?
Centralized vs. De-centralized
We’re still in the wild wild west when it comes to digital currency, and security for these online exchanges and services is not perfect yet. In fact, it may never be completely safe to store funds on a centralized exchange (an exchange that keeps all of its data in one location). That’s why some people within the community are trying to develop decentralized exchanges, in other words, exchanges that are not owned by a single entity and have their data spread among a whole network of people, much like the Bitcoin network itself.
How do I protect my bitcoins?
First of all, DON’T KEEP YOUR COINS ON ANY EXCHANGE! Sure, if you want to do some trading, you will need to keep some funds in your trading account – but do not leave them there for longer than necessary. You should not be using an exchange as a wallet!
The safest way to store your coins will probably always be a paper wallet created on a computer that’s not connected to the internet. It’s not the most convenient thing in the world, and likely not something the masses will ever do, but at the moment it’s the only way to be 100% secure.
For most people with a small amount of bitcoin, storing on a trusted wallet program on your computer is sufficient too (just make sure you use a strong password!).
As Bitcoin becomes more ubiquitous, security will get better and better – and it’s essential for it to go mainstream. But in the meantime fellow early adopters, be your own bank – don’t store your funds with third parties!