Bitcoin’s recent all-time high price of $19,666 and the success of smaller digital assets in 2017 has made the owners of cryptocurrencies a rather large target for hackers and fraudsters looking to make a quick buck. Thus, with the year coming to a close, it looks increasingly likely that 2018 will see a massive uptick in hacks, scams and misleading ventures linked specifically to the virtual currency ecosystem.
According to Coinmarketcap, the total market capitalization of all cryptocurrencies combined is well over half a trillion dollars, out of which bitcoin’s dominance is obvious, at an overwhelming 43 percent. A few years ago, the market cap of bitcoin alone hovered $2 billion, with its competitors nowhere near as popular or successful.
With this increased influx of wealth and subsequent multiplying of prices, ordinary investors are now in absolute control over large amounts of cryptocurrencies. Since the premise of such digital assets involves being one’s own bank, the security of a user’s funds is also entirely up to them. As a result, a lot of people, especially those less technically inclined, fail to sufficiently secure their funds from hackers. Furthermore, digital assets are structured in such a way that it is very difficult to track the funds once it is no longer in one’s possession, making prevention the only measure that is realistically possible.
The US Department of Homeland Security discovered that as much as a third of bitcoin exchanges between 2013 and 2015 were hacked, alongside a myriad of other scams and predatory behavior. This period represented, in contrast, a bear market for cryptocurrencies. Since then, the rising prices have done nothing but add further motive for hackers to siphon funds from exchanges and high-profile individual investors.
In December 2017, The US Securities and Exchange Commission (SEC) announced that it had intervened and halted a “fast-moving Initial Coin Offering (ICO) fraud” that had reportedly raised over $15 million from investors. Additionally, the SEC announced that it was keeping a close eye on potentially similar ICO scams in the future.
Since the value of a cryptocurrency is derived and not intrinsic, there is no real insurance, FDIC or private, securing investors against the loss of their digital assets. Even massive exchanges such as Coinbase are only FDIC insured to the extent of the user’s fiat balance. In the event of a hack or fraud involving the loss of digital currencies, it is unlikely that the cryptocurrency lost by the affected investors will ever be reimbursed, as was the case with Mt. Gox, the now-defunct exchange that suffered a fatal hack in 2013.
Investors, especially those with a large stake in cryptocurrencies, need to be educated about these risks and of measures that can be taken to mitigate the damage of hacks against them. Using a reliable anti-virus, an email service with anti-phishing measures turned on, two-factor authentication, password managers, and hardware wallets are all legitimate ways to safeguard currency and improve security by a significant amount. A protocol for securing cryptoassets has also been drawn up for the ‘rich and paranoid.’ That said, no system can ever be completely foolproof.