Bitcoin emerges from the shadows, but just how safe is it?

WordPress recently announced it would be joining the growing number of vendors accepting bitcoins. WordPress.com, which hosts 58 million blogs across the world, stated it will now accept payments for upgrades via bitcoin, the peer-to-peer digital currency so famous in the underworld. Some hotels and retailers have begun to accept bitcoins. Bitcoin has become versatile enough it can be used to purchase gold and silver. Some online software companies are accepting payments with bitcoins and offering up to 40% discount all products paid with the digital currency. Even some political parties accept Bitcoin. Reddit is considering accepting bitcoins as part of its subscription model.

What is Bitcoin?
Bitcoin is an unregulated, stateless and increasingly global currency. It is an electronic currency that uses a cryptographic system to verify transactions. A bitcoin is an encrypted number that is stored on a person’s computer. It has a fluctuating value based on market demand, and as of today, is worth around US$12.20.

Usages of Bitcoin
Person to person: Bitcoins provide for the anonymous transfer of virtual currency. Bitcoin’s payment network allows means two people can complete an exchange of goods without ever having to know anything more about each other than a 36-character string of numbers and letters, a bitcoin address or account.
Business to consumer: Merchants benefit since there are no chargebacks. Merchants do not need to collect sensitive personal information from users. The flip side of the coin: Bitcoin is traded online and can be exchanged into US dollars or other currencies easily. Bitcoin requires individuals to use a 3rd-party service to trade bitcoins for real currency, and money laundering is theoretically possible using these 3rd parties. Law Enforcement focuses on these third parties to monitor money movement between suspicious entities.
Bitcoins are no stranger to controversy. Potentially they create an untraceable method of moving money and so are feared by Governments. In 2010, when MasterCard and Visa cut off funding to Wikileaks, Wikileaks turned to Bitcoin, raising at least $32,000 USD using the virtual currency. In 2011, the US Senate examined bitcoins and their role as a payment currency for the notorious Silk Road drug site. Also in 2011, LulzSec, although riddled with FBI informants, raised $18,000 USD in bitcoins from their supporters. In September 2012, a group of hackers threatened to release Mitt Romney’s tax records unless he pay them $1m USD ransom in bitcoins. The blackmail money was not paid.

Decentralization of Bitcoin provides a major barrier for law enforcement. They have no doors to kick down, no lines to tap and no one to subpoena. Even if Bitcoin wanted to be regulated, its very structure would severely limit that. Cybercriminals use Bitcoin as another virtual currency, although they seem to prefer liberty reserve, e-Gold and webmoney. Drug dealers demand bitcoins on the Silk Road. Cybercriminals renting DDoS services and botnets are accepting bitcoins for payment. Even firearms are advertised on Tor with ‘global delivery options’ with payment in bitcoins, although many of these are likely scams. For cybercriminals, the lack of a money trail can be a great benefit. If their assets are seized subsequent to an arrest, law enforcement may be oblivious to their password-protected Bitcoin fortune.

How safe are your bitcoins from speculation and manipulation?
Unlike the printing presses of the US government, there is a limit of 21 million bitcoins that will be in circulation. Their value fluctuates according to demand. As more people want bitcoins, their value rises; in periods of rapid selling, their value plummets. In each case, currency speculation, or even manipulation, can make or destroy fortunes. When Mt. Gox, an exchange trade for bitcoins was hacked in 2011, the price of bitcoins dropped from $17.50 USD to pennies within minutes. This occurred because the hacker tried to unload 400,000 bitcoins rapidly. Bitcoin price is highly volume-centric, and the sale or purchase of large numbers of bitcoins can cause bitcoin value to spike or plummet rapidly. In August 2012, a Bitcoin Ponzi scheme unraveled, dropping the price of bitcoins from approx. $14 USD to $10USD. Bitcoin Savings & Trust promised 7% returns per week, approximately 3300% annually, and collected over five million dollars worth of investments. When it shut down, confidence in Bitcoin was affected; people sold their bitcoins, causing a mini-crash. In June 2011, Gawker published an article on the Silk Road and its bitcoin currency. Within days, the price of bitcoins doubled as readers may have tested the veracity of Gawker’s article by purchasing items from the Silk Road. The suspect in the Mitt Romney case allegedly possessed 37,000 bitcoins. Requiring Romney to purchase $1m USD in bitcoins would have increased the value of his existing bitcoins. Bitcoin value is very sensitive to external forces such as news articles, scams and government investigations. With the recent addition of respectable vendors accepting bitcoins, it will emerge from the shadows and grow in popularity. As it grows in use among non-criminal users, the latter will be targeted by malware seeking to steal bitcoins from their digital wallets. Already specialized malware has been created to do just that (infostealer.coinbit trojan), and more is likely in the works. Bitcoin is risky on multiple levels. But with great risk, comes great reward.

This is also posted at https://www.nsslabs.com/blog/bitcoin-emerges-shadows-just-how-safe-it

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