The bitcoin has emerged from relative obscurity over the last couple of years, and is garnering a great deal of public attention as a new, transnational virtual currency. Bitcoins emerged as an alternative digital currency in 2008, and are growing in popularity as both a spendable currency and as investment.
Bitcoins are created gradually over time as complex mathematical problems are solved by computers. Only a limited supply of bitcoins exists and only a total of 21 million bitcoins will ever be produced (the last bitcoin is scheduled to be produced in 2140).
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The fact that bitcoins cannot be artificially manipulated by government actors and are valued strictly on the basis of supply and demand is a double-edged sword. Having a currency that is immune to government meddling that might lead to inflation or deflation was the goal, but the practical result is highly volatile bitcoin prices, especially given the looming threat of government intervention.
Two significant thefts of bitcoins have been reported in the last month. A few weeks ago, outputs.io reportedly lost 4100 bitcoins to a hack, and today Bitcoin Internet Payment System, or BIPS, reported their networks had been compromised and 1295 bitcoins stolen. In both cases the thefts represented a bitcoin value of over $1 million.
Quite a few people store their bitcoins in digital wallets. Many companies offer digital wallet services, some of whom take extreme security measures. That said, nearly anybody can be hacked. No matter how good your external facing security is, there’s always the risk of an inside job.
The attack on BIPS began as a classic Distributed Denial of Service attack on Nov. 15, then the hackers hit again on Nov. 17, overloading the servers and managing to get access to a number of digital wallets, from which they extracted the 1,295 bitcoins they absconded with.
Digital wallets are not 100% safe
The lesson here is that digital wallets are not 100% safe. BIPS CEO Kris Henriksen issued a general warning in the Bitcoin Talk forum a few days after the attack. “Attacks are not isolated to us, and if you are storing larger amounts of coins with any third party, you may want to find alternative storage solutions as soon as possible,” he said.