Bitcoin scams: How safe am I?

The consumer new to cryptocurrency may well being asking; is my money safe?

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Bitcoin scams: How safe am I?

The consumer new to cryptocurrency may well being asking; is my money safe?

In light of recent events, such as the very public fall of Mt. Gox, even the most uninformed investors will have cause for concern. The more background knowledge you have, the more the door to the world of potential threats opens.

But are these more empty threats than serious flaws? CoinTelegraph decided summarize the main developments and determine what implications there are for the average currency holder.


Meet the family

The most pressing concern for entry-level investors will be issues publicized by the Mt. Gox ‘scandal’, with allegations ranging from organized fraud to theft to year-long hacking and mismanagement. As a large number of bitcoins are at the time of writing still classed as ‘missing’, the finger is firmly pointing at former CEO Mark Karpeles for his personal role in the saga.

Similar developments included Sheep Marketplace, one of whose vendors reportedly stole 5400BTC in December 2013, worth at the time almost US$6 million.

As such cases come to light and the initial ‘big fish’ collapse under their own weight, however, it is commonly believed the market will stabilize, allowing larger entities to exist within the space but with the structure required to maintain healthy operations, as well as a positive reputation.

The other main story to make the press, and arguably the most common occurrence among Bitcoin security breeches, is hacking. While it comes in many forms, the example of Mt. Gox’s initial attack in June 2011, even before its high-profile shutdown, of when one compromised account reduced the price of BTC from US$32 to a few cent, caused the market to trade below the previous rate for the following 18 months. It is this volatility which is the consequence underpinning consumer fear about attacks, but market resilience is a phenomenon seen after each such attack.

Thefts targeting individual wallets are something which novice users will be especially vulnerable to, but it need not be so. Users who do not use cold storage, for example, are most likely to be affected.

Sometimes, however, the user has done nothing to compromise security, and it is the exchange which exhibits unreliable behavior. An example is European exchange BTC-e, with many users reporting freezing of their accounts for unknown reasons, with no technical support.

Hardware

Scams also target hardware as well as software, something which crypto newbies will potentially not have the expertise to resolve. Malware targeting computer and mobile device processors is becoming especially common, as the case of infected apps from the Google app store demonstrates.

“I think malware that is specifically targeted at attacking users' Bitcoin wallets will become a huge problem,” Brian Fabian Crain, founder of Bitcoin Startups Berlin, told CoinTelegraph.

Then there is the ‘classic’ paradigm of the double-spend, the threat from within the Bitcoin network itself. A malicious user sending two transactions which are confirmed at different times could potentially defraud a recipient of their bitcoins and/ or product or service, yet this is more than likely solved by the six-confirmation rule for the blockchain. While this reduces the likelihood of double-spending being successful to 0.1%, it is however not eradicated.

A second inherent threat, this one targeting altcoins, is that of the ‘one-day’ currency. A coin may be created and premined at a high price based on perceived ‘backing’, but then flounder as it fails to fulfill expectations. This is especially prevalent among ‘copies’ of more popular coins using the same premise, such as the many disciples of Dogecoin which appeared, following in its style.

Facing weaker coins is also the threat of the ASIC. While some altcoins such as Worldcoin as ASIC-proof, it is possible in other cases for large mining pools to mine an excessive amount of a new currency, increasing the difficulty within a very small space of time to lock out competitors.

Mined coins are then immediately sold and the operation terminated. As technology evolves in this field, it is likely that more attacks of this nature will follow when new forks are created.

A final problem affects a handful of consumers wishing to perform mining themselves. As publicized in the recent case of Butterfly Labs’ court case, the mining hardware market is not always a straightforward environment to deal with.

Customers in this case have reported paying for hardware which either never arrived or arrived extensively ‘used’, with the implication being that manufacturers, instead of simply stress-testing machines before dispatching them, instead use them for their own mining operations.


Much-needed perspective

A brief outline of the state of the cryptocurrency environment is difficult to achieve, with speculation over the true facts of the past as well as their implications on its future possible to an infinite degree.

What must be remembered, however, is that despite the press hype, with appropriate security measures taken by the individual investor and minimal use of online storage, the likelihood of one’s Bitcoin wealth disappearing in an instant is overwhelmingly small.

“The biggest threat is probably keeping your bitcoins with someone else and they get hacked or run away with them,” confirms Crain. “Use 2FA, don't keep substantial amounts in web wallets, use something like the BIP38 system by Bit-Card, that can be secure even if your own computer is compromised.”