Misconceptions Of Bitcoin Security
If you were to believe all of the headlines spun by the sensationalized 24-7 media cycle, you would think bitcoin, the controversial cryptocurrency, was the most unsafe asset class in the world. And, with the year-plus-long price slump, the estimated $500-million bitcoin heist at Mt. Gox, formerly the largest bitcoin exchange on the planet, not to mention this month’s $5-million theft at Bitstamp, these security concerns would not be unfounded for the average investor. But what the average investor doesn’t know is that the technology underpinning the bitcoin network, the “blockchain,” might be the most hack-proof, data-storage vehicle in the history of online security, according to the Business Insider article “Bitcoin’s Blockchain Technology Will Change the World.”
The main problems affecting the bitcoin ecosystem in its early stage are two-fold: the fact that most major exchanges are domiciled in opaque foreign markets; and the negligent use and storage of single-signature “private keys,” or passwords, according to BitAngels Chairman Michael Terpin, a leading bitcoin investor and prolific figure in the bitcoin community. With regards to the former, until January 26th of this year, with the opening of Coinbase, the first American bitcoin exchange, the majority of the world’s most significant bitcoin exchanges were based out of China, and Eastern Europe, which are not known as bastions for business transperancy.
And regarding the use of single-signature security applications, like the ones that safeguarded BitStamp’s digital wallet, according to Pantera Capital, that practice is becoming obsolete with the advent of multi-signature, or multisig, security features. While single-signature security involves the use of one password, which in BitStamp’s unfortunate case, was stored online, according to Coindesk, making it easy prey for a hacker, multi-sig applications distribute multiple passwords, usually three, to various parties and the accessing of the bitcoin wallet is predicated on the combined entry of any two of three private keys authorized, according to Gem CEO Micah Winkelspecht. The benefit of multisig is that it eliminates single points of failure.
But the most compelling security benefit of bitcoin technology is the blockchain, the chronological and, since bitcoin became operational in 2009, completely irrevocable, ledger-database that records every transaction in the history of the asset, according to The Economist Article “How Bitcoin Mining Works.”
To compromise this database, a hacker would have to launch a so-called 51% attack, and take over more than half of the bitcoin network, which has 13,000 times more processing power than all of Earth’s 500 supercomputers combined. To put it another way, altering a “block,” or transaction record, on the blockchain, the way a corrupt banker might alter bank or payment data to perpetrate embezzlement or fraud, would require more energy than presently exists on earth, according to Pantera Venture Associate Johnny Dilley. The other compelling of the blockchain is that it allows any two people on Earth to transact freely and cuts out intermediaries, like banks, who collect fees from the transfer of money, added Dilley.
While bitcoin remains an asset most suitable for speculative traders, looking to make opportunistic gains in a volatile market, it’s future as an investment and as a currency remains highly uncertain – not trusted in most parts of the West, prone to threats of theft and highly unstable.
But, there is hope for the blockchain upon which the cryptocurrency is built which could have disruptive implications for smart contracts, creating liquidity in the developing world, medical record storage and of course, the juggernaut known as the financial industry. Even with all its problems, there is still hope for blockchain and the bitcoin so closely attached to it.