Beware Bitcoin: A Recent Cyber Attack Highlights Risks of Digital Currency

A huge cyber attack on digital currency bitcoin is turning heads.

According to a Reuters article published by the Huffington Post, the attack is known technically as a distributed denial of service attack, and it “involved thousands of phantom transactions, forcing at least three of the online platforms that store bitcoins and trade them for traditional currencies to halt withdrawals of bitcoins until they can determine which transactions were real.”

So far, the source of the attack remains unknown.

“Bitcoin is still an experimental protocol in its infancy,” Micky Malka told Reuters. Malka is a venture capitalist and is on the board of Bitcoin's trade group, the Bitcoin Foundation.

“It will grow and mature over time,” said Malka. “No one should be investing an amount they cannot afford to lose.”

Bitcoin lives in cyberspace and is as vulnerable to attack as any other business on the Internet.

“Anyone who plays in this space, you better have a plan for when an attack happens because it's going to be a ‘when,’ not an ‘if,’” Brian Krebs, a Washington-based cyber security expert told Reuters. Krebs runs the blog KrebsOnSecurity.com.

Lesson for Investors – Bitcoin Not as Liquid as Advertised

According to the article, Jason Scharfman, a financial due diligence expert and managing partner at Corgentum, said there is a lesson for investors in all of this – the bitcoin is not as liquid as it was initially advertised.

“These types of attacks, they're effectively freezing some of the accounts because the exchanges don't want to pay out to the wrong person,” said Scharfman. “If something's frozen or there's a question about me being able to redeem my bitcoins, the value of them drops.”

“Does this spook financial investors?” he said. “The answer is yes.”

Scharfman suggests spreading out the holdings of bitcoins among various online storage facilities. Doing this would mitigate the risks of these kinds of attacks because if one facility is hit, the others might still be safe.

“Regulation will sort of normalize which exchanges are the most secure. They'll mandate security measures and smaller exchanges just won't be able to afford it,” Scharfman told Reuters.

 

For more information, see the original article here: http://www.huffingtonpost.com/2014/02/13/cyber-attack-bitcoin_n_4777125.html
For an interesting read, see the article, “Bitcoin needs to learn from past e-currency failures” here: http://www.ft.com/cms/s/2/6d51117e-5806-11e3-a2ed-00144feabdc0.html#axzz2tkHBqHmt