The Bitcoin system is probably the most transparent payment system in the world, since anyone with a node can track a transaction. But, when cautiously used the Bitcoin offers high levels of privacy.

The privacy that the Bitcoin market offers is what sells it! Every Bitcoin transaction requires a set of keys and a digital wallet. But, nowhere does it require the user to reveal their identity. Although some digital wallets, Bitcoin clients and even mining software would require registration with user details, these details would never be attached to any transaction. And thus the details would never surface on the Transaction Block Chain.

Furthermore, since each transaction is associated with a Bitcoin address, which is publicly available for anyone to check the balances, the Bitcoin privacy may be questionable. Sometimes, the users are also required to reveal their identity while buying goods and services on the internet and this may be magically traced to the Bitcoin address. Therefore, it is highly recommended to use new Bitcoin address for every transaction.

Additionally, it is also recommended to use multiple digital wallets for receiving payments, as they may be victims to possible attacks. By doing this, one isolates the possibility of losing away all your money, in case of a theft. One should be extremely vigilant about receiving payments through Bitcoins.

Furthermore, some Bitcoin clients are designed to send the resulting change of a Bitcoin transaction to a different address. For example, if the address A has 10 BTC, and you send 8 BTC to address B, then the Bitcoin client would send the change of 2 BTC to a different address C (pre-defined by you). This makes it difficult for hackers to know whether you own the address A or C. This is one of the best ways to be safe while sending payments through Bitcoins. So, selecting the right Bitcoin client is very important.

You should be careful of where you store the private key. The best places to store the key are offline, where the internet hackers cannot reach. Also, you should be careful about which IP address you use. Most of the IP addresses can be tracked using free online tools. It is essential to know all the safety concerns and constantly being vigilant.

Hacking opportunity

In spite of the anonymous nature of the Bitcoins and the various other safety features of the Transaction Block Chains, thefts, heists and frauds relating to Bitcoins are not uncommon.

In June 2011, Allinvain, a Bitcoin user was the victim of the first major Bitcoin heist. To his shock, a hacker had stolen close to half a million dollars in Bitcoins. In 2012, BitFloor, a Bitcoin exchange site was hacked and 24,000 Bitcoins were stolen. In September 2013, about 1000 Bitcoins were stolen from BIPS, a virtual wallet.

In November 2013, Sheep Marketplace, the online underground bazaar was robbed of Bitcoins worth millions of dollars by a vendor called EBOOK101. A bug in the system was found by the vendor and he got off with 5400 Bitcoins! That, as of February 2014 amounts to about $5 million! Consequently, a group of users started tracking the vendor by following the block chain trail. But, they couldn’t be successful as the vendor was bouncing the Bitcoins from one Bitcoin address to another.

Credit cards fraud victims can reverse and cancel fraudulent transaction by calling the issuing bank. But, since the Bitcoin transactions are anonymous, they are irreversible. This is a huge drawback to the victims as there is nothing much they can do about the theft.

If you think about it, what would you do with the stolen Bitcoins? Let’s think like a thief now. What is the first thing you would do to steal Bitcoins? The answer is copy the keys!

Bitcoin transactions are associated with two keys – a public key and a private key. Owning a Bitcoin essentially means owning a private cryptographic key to a Bitcoin address. The key is a string of letters and numbers. These keys can be stored anywhere in the world like a hard drive, an online storage account or even a tattoo on your body. Who cares?

This is where attacks can be easily carried out. The entire Bitcoin system is protected by various security levels, but the vulnerability lies in gaining access to the one string that controls the whole system. The private key is the main component of the Bitcoin system, through which the initiation of a Bitcoin transaction is made. In an online key storage company, what would you do if you had access to the key database? Copy the whole database, isn’t it? That’s what an insider working at such companies can do. Once acquired, you can spend the Bitcoins in any way you please, until the owner removes them from his Bitcoin address.

But, there’s again a catch here. Since, the Bitcoin transactions are publicly available to all the users through the blockchain; it would be hard for you, the thief, to get away with it. Although, the present tracking techniques can only identify the transaction location but not the identity of the user.

If you try to move the Bitcoins to another address, that path would also be recorded in the transaction chain. But, there is a way out. A thief can transfer the Bitcoins in small amounts to different address, eventually converting all the stolen Bitcoins into safer ones. This way it is highly impossible to track the thief and this is how a hacking or theft takes place.

Once, the thief gets the stolen Bitcoins converted into safer ones, he tries to sell them. But, since the Bitcoin market is still relatively small, any huge sale would instantly bring down the price of the Bitcoins as it would trigger other users to sell.

So, a thief would unload these Bitcoins using different easing techniques such as Dollar Cost Averaging, where the small subsets of Bitcoins would be eased into the market at regular intervals. This would avoid panic as there would be an unnoticeable dip in the market price.

Therefore, it is important for Bitcoin users to constantly keep a track of such thefts to improvise the ways of key storage. Furthermore, the user should be very cautious about whom he gives access to his key, as there is no regulation that can trace or retrieve stolen Bitcoins.

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AuthorTeam Bitcoin