Many people are still afraid to adopt Bitcoin. One of their main fears is virtual security. They think Bitcoin has too many weaknesses or that malicious people can compromise the digital currency. Their skepticism arises from stories of exchanges being hacked or Bitcoin itself being defenseless against cyber assaults — but there is nothing wrong with exercising healthy skepticism. It is just that fear of risk in Bitcoin is misplaced or exaggerated.
Also read: The Subjective Valuations of Bitcoin & Gold
Bitcoin is open source software. It is a networked protocol that grows as developers expand and enhance it. No one can alter Bitcoin unless the network forms consensus. In the early stages, however, there were not ways to store Bitcoins safely, and hackers were able to exploit the system. They were able to use malware and other nefarious methods to steal private keys that protect wallets; this is still possible, but unlikely so long as the user possesses some technical knowledge.
Bear in mind that stealing keys is not akin to undermining Bitcoin core. The software is protected by a distributed network. It would take tremendous computing power to hack or otherwise harm the protocol. The blockchain that Bitcoin is built upon is practically inviolable at this stage of development.
Please read more about how Bitcoin stops the Skimmers and Fraudsters.
A Security Breach
Hackers were originally able to breach security because people kept their Bitcoin in exchanges, like Mt.Gox. Bitcoins were not meant to be stored with third parties, though. They were meant to be placed in the hands of the individual. The person was supposed to be their own bank; but since the protocol was in its infancy, and people had no recourse to secure holdings, they relied on exchanges. The result was a lot of stolen or lost Bitcoin.
Nowadays, most wallets are encrypted end-to-end and stored locally on cellular phones. Each application within these phones is independently protected. A smart phone is more difficult to crack. People also use paper wallets, as well as hardware wallets. Both provide advanced security. Paper wallets are especially useful for saving large sums of Bitcoin because they touch the internet less often, which diminishes the likelihood that a hacker will be able to access private keys. Most people also choose not to store Bitcoins on desktop computers or laptops, since they can be accessed easier by hackers because of all the potential back doors.
Mycelium company offers a new device called “entropy” that plugs into a printer and spits out paper wallets; this is a new innovation that foreshadows a movement towards paper-based accounting and key holding.
Faith in Mathematics
Faith in Bitcoin rests on mathematics. Individuals do not have to “trust” others with their money. They just have to “trust” the protocol. It is really not faith or trust-based at all. In the beginning, crypto-enthusiasts sacrificed the trustless protections of the protocol for the convenience of third party services; this was a mistake the community has since overcome.
Third party services are still in use. Now, they have more professional security controls in place, which help prevent internal fraud as well as external threats. Blockchain.info is a platform that uses individual files to encrypt wallets even though they are stored online, non-locally. Programmers are always devising similar methods to solve problems. Needless to say, relying on other individuals to hold funds goes against the original rationale behind Bitcoin’s functionality. As the system matures, reliance on third parties should become less desirous.
The risk assessment today is much less severe than it was early on, but this does not eliminate the chance of future problems. If problems do arise, the Bitcoin community is at a stage of maturity that they would be able to react quickly and mitigate problems.
Risk Assessment for Credit and Debit Systems
Out of all concerns with Bitcoin, a safety threat from virtual assaults is the most ironic. A lot of people who complain about Bitcoin risk still use centralized debit and credit systems. Attempting to protect their money in a system that shares tons of private data with third parties and leaves personal information suspended in the digital world is a recipe for disaster.
Companies like Target have already admitted losing credit card data to hackers. According to Paul Vigna and Michael J. Casey’s book, “The Age of Cryptocurrency,” the attack on Target was a 148 Million dollar hit. They also mentioned Home Depot. They said, according to sources, that hackers stole 56 million credit card swipes from Home Depot in August of 2014. “You can easily make the case that legacy payment systems are actually more prone to fraud than Bitcoin,” said the authors.
Just carrying around cards with personal information is problematic. Losing them could inadvertently give someone unauthorized access to sensitive details. The risk factor for centralized credit systems is much higher because it relies on spreading information everywhere and trusting unfamiliar people with that info.
Bitcoin does not share these problems because the protocol does not rely on people having to divulge their private information (unless exchanges are used). The only information that transfers is the public key, which can only be accessed with the corresponding private key. Above all, the Bitcoin system allows plenty of room for improvement. Since anyone can theoretically alter the protocol for community good, the system can continuously and quickly solve problems and grow.
Centralized systems will never have this capability. They are too slow and cumbersome, and only a few of the same individuals can work on them since they are not necessarily open source. This is a huge issue for these financial services and goes to show why the risk assessment for them will always be greater, and why Bitcoin’s decentralized risk will always be much less.
Do you believe Fiat Currency is Riskier than Bitcoin? Let us know in the comments below!
Image Sources: observer.com, swale.gov.uk
The opinions expressed in this article are not necessarily those of Bitcoin.com.