The bitcoin security threat is bigger than many people think, based on a recent report on bitcoin vulnerability funded by the U.S. Department of Homeland Security.
Nearly one-third of bitcoin trading platforms have been hacked, reports Reuters , while about half have closed up shop in their first six years. In addition, there is no depositor’s insurance to cover losses, meaning investors in the cryptocurrency have no choice but to do business with exchanges that cannot absorb losses the way that traditional banks and exchanges do.
One trader who lost $1,000 in bitcoin from the recent Bitfinex hack who wished to remain unnamed said there is a general sense among cryptocurrency users that any centralized repository is at risk. The investor said he knows traders who have lost millions of dollars’ worth of bitcoins.
Tyler Moore, an assistant cybersecurity professor at the University of Tulsa’s Tandy School of Computer Science, said he is skeptical of any technological solution to address the security challenge. Moore will publish research on bitcoin exchange vulnerability funded by the U.S. Department of Homeland Security.
Moore’s research indicates 33% of bitcoin exchanges operating since the cryptocurrency’s creation in 2009 have been hacked. This marks one of the first estimates of bitcoin security breaches.
The Privacy Rights Clearinghouse, a non-profit organization, has data indicating only 67 banks out of 6,0000 experienced a publicly-disclosed data breach from 2009 to 2015, accounting for 1% of U.S. banks.
Breaches among stock exchanges are more common. The International Organization of Securities Commissions and the World Federation of Exchanges surveyed 46 securities exchanges and found more than half suffered a cyber attack.
The closure rate for bitcoin exchanges in Moore’s recent study increased to 48% for those operating from 2009 to March 2015. The closures were not necessarily caused by hacking.
Richard Johnson, vice president of market structure technology at Greenwich Associates, said a 48 percent closure rate is not acceptable, but it is not surprising for new technology.
Erik Voorhees, founder, and CEO of ShapeShift, said a bitcoin exchange can launch for as little as $100,000, which is a fraction of what is needed for a U.S. forex exchange.
One factor impacting the risk posed by bitcoin exchanges is whether or not customers are reimbursed following a hack. In Bitfinex’s case, customers lost 36% of their assets and were compensated with credit tokens to be converted into the parent company’s equity.
Mt Gox customers have yet to recover their losses two years after the exchange’s closure.
Voorhees noted that big exchanges are major targets for hackers.
Darin Stanchfield, CEO at KeepKey, a hardware wallet provider, said more attacks will occur despite efforts to improve bitcoin security. He said because of the cryptocurrency’s irreversible nature, it requires near-perfect security.
Moore and Nicolas Cristin, an associate research professor at Carnegie Mellon University, authored a paper on bitcoin exchange security risks titled, “Beware of the Middleman: Empirical Analysis of Bitcoin Exchange Risk.” The paper was presented at the 17th International Financial Cryptography and Data Security Conference in Okinawa, Japan in 2013, and was peer-reviewed.
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