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Why Bitcoin and Blockchain Are ‘Relatively Safe’

Last Updated March 4, 2021 4:54 PM
Lester Coleman
Last Updated March 4, 2021 4:54 PM

In a report  by Swiss multinational financial institution Credit Suisse, bitcoin and blockchain are deemed to be ‘relatively safe’.

Bitcoin has some unique risks, the report noted. The value of the cryptocurrency has been three times more volatile than the price of oil and 11 times more than the post-Brexit exchange rate between the British pound and the U.S. dollar, according to the bank’s markets research department.

Bitcoin transfers are also irreversible, so someone making a mistake entering an account number when making a payment will be out of luck. In addition, if a bitcoin user loses their private key, they can lose all their bitcoin.

Blockchain’s Immune Structure

Bitcoin’s blockchain architecture has demonstrated immunity to hacking risks. The blockchain is not an interconnected series of individual accounts, but a record of past transactions. When a user wants to transfer bitcoins, all computers running the bitcoin software process the sender’s signature through an algorithm and checks the past transactions encoded in the blockchain to ensure the sender owns the bitcoins they say they do.

Other computers then verify the recipient’s work. The transaction is then aggregated with other transactions, and computers running the bitcoin software, known as miners, race to solve a mathematical puzzle to verify the transactions. One miner wins the race, while the others verify the accuracy of the solution. When they agree the transactions are valid, the miner winning the race receives new bitcoins, thereby increasing the bitcoin supply.

A Challenge for Hackers?

Theoretically, someone could hack into the blockchain and alter the record to make it look like previous bitcoin transactions transferred money to the hacker’s account. But it would require huge computing power. Bitcoin users verify a transaction by looking at all past transactions, so a hacker needs to solve the mathematical puzzle linked to a particular block to manipulate it, and also with the blocks that come after it.

Blocks are only considered valid six blocks deep into the chain. The deeper one goes into the blockchain, the more computing power needed to alter records.

A 51 Percent Attack

Concentrated share among bitcoin miners also presents a potential risk. If a single party gained control over 51 percent of the bitcoin network, it could theoretically stop legitimate new transactions from settling or undoing recent confirmations, potentially enabling it to double spend the bitcoins.

Credit Suisse, with 30 percent of the network, has calculated that a malevolent actor has a 40 percent chance of mining six consecutive blocks in one week, enabling them to alter transactions. In the event of a so-called “51 percent attack,” however, bitcoin’s value would plummet. In other words, miners attacking the network would also undermine the value of the same assets they attempted to steal, along with the assets they already own.

To acquire 30 percent of the network, the malevolent actor would need to mine past blocks. Hence, they have a stake in keeping the ledger intact.

Also read: Can the blockchain deliver security to banks against cyber attacks?

Cyber Theft Of Cryptocurrency

Most bitcoin users use online exchanges to exchange fiat currency for bitcoin, and digital wallets that facilitate payments. Both have been suffered cyberattacks. In August 2016, hackers stole 119,756 bitcoins on deposit with the Bitfinex exchange.

The Mt. Gox exchange filed for bankruptcy in 2014, claiming hackers stole 850,000 bitcoins. Only 24 percent of the coins have been recovered. Japanese prosecutors charged ex-CEO Mark Karpeles with embezzlement. Various articles have laid the blame for the exchange’s problems on unorthodox management.

The bottom line is that blockchain technology and bitcoin trading are relatively safe. Complications arise when people enter the mix.

Image from Shutterstock.