Another Bitcoin Breach – 120,000 Bitcoin Missing

A lot of big financial institutions are ‘investigating’ the use of the blockchain technology that the digital currency Bitcoin uses.  I would point out that this is very different that endorsing the use of Bitcoin.

In 2014 the Mount Gox Bitcoin exchange filed for bankruptcy after a breach lost $460 million.

In May of this year, Hong Kong based Gatecoin announced a breach of their exchange.  It was smaller – around $2 million.  They decided to hack their own blockchain to stop the attacker from being able to liquidate the stolen bitcoin.  Granted, they did it very publicly, but still that is scary.

Over the last 4 or 5 years, there have been dozens of Bitcoin exchange breaches and failures.

This week another Hong Kong based Bitcoin exchange, Bitfinex, announced a breach of 120,000 Bitcoin valued at about $72 million, depending on the current value of a Bitcoin.  Bitfinex immediately halted all trading and shut down their web site as they try to figure out what happened.  That means that customers lost access to their money and don’t even know if their accounts were among the ones hacked and therefore, whether they have any money left in Bitfinex.

With very minor exceptions, most Bitcoin exchange are not even willing to talk about insurance, never mind offering it.  2 or 3 of the dozens of exchanges do offer some insurance, but the rules are convoluted and only cover a fraction of your deposits.  The rest won’t even talk about the subject.

When Bitfinex halted services, the value of Bitcoins dropped about 20 percent, but they have recovered some since.

Given the apparent fragility of the Bitcoin exchange world, why are people running to put their money in Bitcoin?

I think that is a good question – one that I don’t have an answer for.

The problem, I think, is not with the math behind Bitcoin.  It is a problem with the software and/or the business process.  Given the state of modern software development – Microsoft, Google and Oracle, just to name three vendors, collectively release probably a thousand software patches a year – it is kind of amazing that Bitcoin exchanges are not hacked more frequently.

It is a hard problem and I predict it is not going away any time soon.

I think now is a good time to make some popcorn, open a beverage of your choice and watch the Bitcoin exchanges do their thing.  Over the next few years we will likely see more breaches and more bankruptcies.  But I doubt we will see more insurance because the premiums, unlike with U.S. based banks and the FDIC,  are likely to be astronomical because the insurance companies have no idea who is going to be breached next and how big the loss will be.

Enjoy that popcorn!

Information for this post came from Reuters and Inside Bitcoins.

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