What is Bitcoin?
Bitcoin was the first decentralized digital currency. It was created in 2009 by an anonymous programmer, or groups of developers, under the name of Satoshi Nakamoto.
Bitcoin is an innovative payment network and a new kind of money.bitcoin.org
The Bitcoin digital coins can be transferred P2P (Person-to-Person) via the Internet rather than through an intermediary such as a bank with the advantage being lower fees. Transfers can be made between parties in different countries too which removes the need for paying expensive international transfer costs.
Bitcoin accounts (or Digital Wallets) cannot be frozen by any entity and do not have application requirements in order to open one. Whole or fractions of Bitcoins can be purchased using traditional FIAT (government-issued) currency e.g. EUR, GBP, JPY, USD.
How does Bitcoin work?
A single Bitcoin is made up of 100 million satoshis and exists in digital form only i.e. there are no physical notes or coins. The transferring of Bitcoin between a sender and a receiver is referred to as a ‘transaction’.
Each Bitcoin wallet has an address which is a string of mixed case numbers and letters (e.g. 3D6yakCcDRmppdB7PX94WZ8ByYY6mjtUZZ). These wallets can take the form of a smartphone app making them easy to use and mobile too. Alternatively they can be accessed via web browser or computer app.
Transferring Bitcoin involves the sender inputting the address, or scanning the QR code, of the receiver’s wallet and then specifying how much Bitcoin to send from their own wallet. Once a transaction has been initiated then it is broadcast to the Bitcoin network.
Security is provided on the Bitcoin network by ‘miners’ who verify the transactions and in turn are rewarded with newly generated Bitcoin for their work. This is how new Bitcoin is brought into circulation.
Is Bitcoin secure?
Whether or not Bitcoin is secure to use is a commonly discussed topic to which there are two main answers:
- Yes the underlying technology is secure.
- Yes & No depending on the practices of the (human) sender.
The underlying technologies used by Bitcoin comprise of Encryption and Distributed Computing:
At the core of Bitcoin security, as with many cryptocurrencies, is the use encryption in the form of cryptographic signatures. In the case of Bitcoin this is the ECDSA (Elliptic Curve Digital Signature Algorithm).
ECDSA uses the following elements to ensure Bitcoin funds are only spent by their rightful owners:
- Private key – this key or ‘seed’ is a randomly generated 256-bit number known only by the owner of the funds.
- Public key – a publicly shareable number that is calculated from the private key but cannot be used in reverse to generate the private key.
- Signature – consists of two numbers generated from a hash and the private key. The signature is used in conjunction with the public key to verify that it was generated from the hash and private key and was not altered hence providing a method of authentication.
Bitcoin transactions are recorded in a shared public ledger, known as a ‘Blockchain’. This is electronically viewable on the Internet and replicated over many thousands of computers across the world.
Miners of Bitcoin use a concept known as Proof Of Work (POW) to perform complex calculations that are used to verify and confirm transactions. These transactions are then included in the Blockchain in chronological order within blocks that are generated by the miners.
In order to ensure that a corrupt miner or hacker does not interfere with a Bitcoin transaction, the miners that process a broadcasted transaction operate using a consensus system. This consensus system works on the basis that the majority of the miners agree on the transaction verification outcome.
One further thing to note is that the software that powers Bitcoin is Open Source so the code is available for public review. This means that it has been reviewed and audited by security experts and is open to further reviewing in order to identify security flaws that could potentially be exploited by cyber criminals.
Are there dangers using Bitcoin?
Potential dangers do exist with using Bitcoin, or any cryptocurrency for that matter. In the following section we look at the Risks & Good Practices plus examples of Past Exploits:
Risks & good practices
We saw in an earlier section that the underlying technologies used by Bitcoin are secure due to the use of encryption, consensus processing of transactions, and having Open Source code whereby the software is open to public scrutiny.
The majority of the risks come from the human side of using Bitcoin and general privacy & security practices whilst using the Internet.
In our previous article, Keeping your Digital Currency safe using Crypto Wallets, we examined the various types of crypto wallets available for holding cryptocurrencies. The key takeaways were as follows for avoiding the potential risks with storing Bitcoin or any cryptocurrency:
- Type of wallet – use the right type of digital wallet that meets your needs e.g. Hot Wallet, Cold Wallet, or Hardware Wallet.
- Wallet security – properly secure your crypto wallet e.g. use of a separate secure email, strong & different passwords, and two-factor authentication.
- Website access – navigate to crypto-related websites directly to avoid phishing attacks e.g. CEX & DEX (Centralized & Decentralized Exchanges).
- Wallet seeds – write them down & keep them safe!
- SSL & VPN access – only access secure websites and ideally over a secure connection when buying, selling, sending, or receiving crypto.
In another article, Trading Safely with Cryptocurrencies, we took a look at how to safely shop or trade with crypto. This covered the following:
- CEX (Centralized Exchange) – registration, deposits/withdrawals, backups, authentication, and buying/selling/sending/receiving crypto.
- DEX (Decentralized Exchange) – trading (buying/selling) tokens with a digital wallet, token security, and examining transactions.
In a recent article, Crypto hacks, heists & scams, we looked at some past events that have taken place related to cyber crime involving various cryptocurrencies.
This article begins with examining ‘how secure is cryptocurrency?’ by covering the technologies used and areas of vulnerabilities such as exchanges, software/hot wallets, user devices (computers, smartphones etc), Internet connections, and human behavior.
Examples of some exploits covered include:
- KuCoin Crypto Exchange $280m hack – this breach involved hackers gaining access to hot wallets on the exchange having obtained the Private Keys.
- UK-based EXMO Exchange $52m hack – a variety of cryptocurrencies held in hot wallets were transferred out of the exchange.
- Ledger Wallet provider data breach – involved a data breach whereby personal information of 270k+ users was stolen from their website due to a vulnerability.
- Yearn.finance Vault raided – $2.8 million was stolen from a shared digital “vault” on the investment website.
- https://bitcoin.org – the official website of Bitcoin.
- https://en.bitcoin.it/wiki/Main_Page – Bitcoin Wiki.
- Bitcoin information on crypto sites:
- https://www.investopedia.com/terms/b/bitcoin.asp – Bitcoin Guide on Investopedia.
Do you have an opinion on how secure Bitcoin is? Have you ever lost some Bitcoin due to being hacked or cyber crime? If so please comment below.