Launched in 2009, Bitcoin has become the dominant cryptocurrency in the market – amassing a market capitalisation of over 42USD billion and reaching a current trading price of 2573.66USD as of July 2017.
Bitcoin is a digital currency that was released as open source software eight years ago. Given the growth in usage of the digital currency, speculators across the globe are beginning to wonder how secure this decentralised currency system is in practice – and how secure will it remain moving into the future?
Bitcoin (BTC): Price against USD up over 500% over the past twelve months – alongside significant volatility
1) Bitcoin Security
Bitcoin is a cryptocurrency – this means that cryptography is applied at its core protocol to facilitate anonymous transactions across a decentralized currency system.
In its central design, this approach makes the digital currency a secure one. Specifically, the blockchain and encryption add security features. However, there are a number of logistic channels in using the digital currency that expose Bitcoin users to risk.
Bitcoin applies the well-regarded SHA-256 encryption technique for both its Proof-of-Work (PoW) system as well as for transaction verification. These measures enhance the security of the bitcoin protocol.
The fundamental security measure of Bitcoin is based on a blockchain system – a chain of multiple blocks which act as a historic ledger of all transactions that have ever taken place in chronological order.
This facilitates a peer-to-peer system in which transactions occur between users directly, rather than through an intermediary. The transactions are verified by a network of distributed nodes which are then recorded in a public distributed ledger – the blockchain.
4) Storage Security – Wallets
Bitcoins are stored in wallets – online accounts that hold Bitcoins. However, these kinds of wallets do not actually store the bitcoins like a typical bank account. These wallets contain a public key that is used to receive bitcoins to the correct wallet – as well as a private key that is used to verify the ownership of the origin of the bitcoins that are transferred in the transaction.
These digital accounts are subject to online risks – especially if the keys are accessed by the wrong parties.
5) Double Spending
It has been proven possible to circumvent blockchain security and double spend the same bitcoins.
One example is when a vendor does not wait for transaction confirmation and the same bitcoins are spent twice by the fraudulent spender – who executes two purchases in quick succession – to send two conflicting transactions into the network. However, this type of security breach is rare and requires an exorbitant amount of computing power to succeed.
6) Exchanges – Security Breaches
Mt. Gox, was formally known as the number one Bitcoin exchange and has now filed for bankruptcy protection, having lost 468USD million worth of bitcoins due to security breaches.
The exchange fell prey to Distributed Denial of Service (DDoS) attacks aimed at taking advantage of bitcoin’s transaction “malleability” during this type of attack. “Malleability” in this case refers to the fact that valid transactions can be modified so that the transactions appear to not have gone through, when in fact they have been processed.
Overall Bitcoin is very secure. The main risks in usage depend on the storage and exchange facilities bitcoin holders choose to use for their transactions.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future
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