You may have heard of a new kind of currency, existing solely in the abyss of the ever-changing digital landscape, coined ‘Cryptocurrency.’ This new form of payment is a digitally-hosted, encrypted unit of currency to which sophisticated techniques are applied to initiate the verification process of all funds transferred.
The main difference between using traditional forms of currency, such as paper cash, and cryptocurrency, is that the latter is not backed by a central government or bank. The formal definition states that cryptocurrency represents “…a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.”
In other words, cryptocurrency has completely adopted the open-source model.
Media coverage of the most common form of cryptocurrency, Bitcoin, has skyrocketed over the last year. Bitcoin boasts a return of over 700% year-to-date (YTD), with a market cap approaching $170 billion. Still, the digital currency has received high levels of scrutiny from big-wig investors (think: Warren Buffett) and new information is released daily, which attempts to uncover the truths of this paradigm shift.
Before deciding to hop on the Bitcoin bandwagon, it’s important to fully understand the risks and implications of the unknown world of encryption keys, digital tax evasions, and Blockchain technology.
If you remember only one thing about the way that Bitcoin works, it should be the concept of blockchain technology. Blockchain is the foundation of Bitcoin as a whole, as it has revolutionized the transparency of trade and financing as we know it. A behind-the-scenes look at Bitcoin reveals that the entire system depends solely on a shared general ledger, which actively records each Bitcoin exchange or transaction. While this functionality easily tracks and records all Bitcoin activity, Bitcoin’s untraceable nature can be attributed to the unique encryption model of the blockchain.
Because these transactions are part of an open-source system, all users can view and approve of the transactions that occur. The validity of each exchange is separately verified and protected through a digital signature that corresponds with the sending addresses involved in a transaction.
No middle man is required to process or approve a transaction, and therefore, blockchain allows users complete control over the way currency is handled.
Bitcoin appeals to many people because the currency can represent numerous forms of payment aside from traditional currency. Bitcoin can be used to buy shares of stock, acquire a percentage of a company, transfer rights of ownership, or represent a signed deed or title, to name a few.
While this is appealing to savvy investors, the untraceable nature of Bitcoin attracts another crowd as well. Early on, Bitcoin was heavily criticized for how easily it permitscurrency users to purchase, trade, and sell illicit goods such as narcotics, drugs, and gambling services. Not to mention, tax evasion has become one of the major concerns regarding a currency unowned by one single entity and essentially uncontrollable by any outside party. Considering this, it is clear to see how criminals utilize cryptocurrency to easily participate in illegal online activity without fear of being caught.
Untraceable illegal activity, as well as cyberattacks, are both critical risks of Bitcoin. A cryptocurrency exchange called Mt. Gox handled about 70% of trading volume for Bitcoin when it underwent an immobilizing cyberattack four years ago. This attack resulted in the theft of $6.8 billion worth of Bitcoin and contributed to the eventual loss of 80% of Bitcoin value.
This significant data loss represents a huge flaw in the cryptocurrency exchanges. A digital currency existing solely in cyberspace leaves ample room for future attacks. Cyberattacks signal the overall instability of this market and could mean the eventual deterioration of Bitcoin market value.
While people and businesses have readily adopted the concept of Bitcoin, its acceptance is still not extremely widespread. According to Bitcoin Market Journal, a fair estimate approximates 20 million Bitcoin users worldwide. While this number is expected to steadily increase, the rapidly rising price of Bitcoin continually narrows the user market.
Wallet theft, bribery attacks, tampering, routing attacks, and time jacking are just a few of the security threats facing this controversial digital currency. Mining for Bitcoin requires top of the line, highly advanced computer systems that can generate and sustain high power output. These computers, while highly advanced, are still susceptible to frequent and intrusive attacks.
Thorough and comprehensive research into the security and privacy aspects of Bitcoin supported by resources on arXiv.org reveals, “existing security solutions for Bitcoin lacks the required measures that could ensure an adequate level of security for its users.”
We mustn’t overlook the major implications of cryptocurrency and its counterparts. They all pose serious risks for increasing cyberattacks and crime. Before deciding to partake in this growing phenomenon, ensure that you are properly armed against inevitable attacks that are expected to increase in prevalence as popularity for this currency exchange grows.
If data loss does occur, you know who to call.