Here are the drawbacks with digital currencies: Hackers and scammers can make them vanish. If an owner has a poor memory, the bitcoins can get locked for eternity in an electronic wallet, like a fly in amber.
Some high-profile people have admitted this year to losing cryptocurrency, among them Apple cofounder Steve Wozniak.
In another case last month, a cryptocurrency promoter doing a livestream on his YouTube channel was notified by a viewer that digital currency was flowing out of the host’s virtual account. The host later acknowledged he suffered losses of “over $2 million.”
In the Wild West world of bitcoin and other digital currencies, many new investors may not fully grasp the challenges of keeping their crypto investments safe, whether on their own devices or lodged in accounts at exchanges around the globe.
“I suspect many small investors may assume that their money is as safe as it would be in an online bank. But that’s not necessarily the case,” said Graham Cluley, a British security blogger and researcher.
Bitcoins first emerged in 2009, spawning the creation of dozens of other digital currencies that exist only in electronic form. They operate independently of central banks and have fluctuated wildly in value. A single bitcoin traded for around $9,130 Thursday afternoon.
Cryptocurrency exchanges, where buyers and sellers gather to trade digital currencies, are like honeypots for hackers. In the largest known heist to date, hackers in late January made off with around $530 million in cryptocurrency from a Tokyo-based exchange, Coincheck.
“South Korea said they thought it could be North Korea (behind the heist) but I haven’t seen any other evidence of that, and it has the hallmarks of the typical cyber hack by thieves,” said Yaya J. Fanusie, a former economic and counterterrorism analyst at the CIA who is now at the Foundation for Defense of Democracies, a national security think tank in Washington.
An Italian-based platform, BitGrail, reported that hackers made off with more than $170 million of a cryptocurrency known as Nano in February.
The loss experienced by Wozniak stung, even though he is a multimillionaire.
“I had seven bitcoins stolen from me through fraud,” Wozniak told the Global Business Summit in New Delhi Feb. 26, according to the Economic Times newspaper. “Somebody bought them from me online through a credit card and they cancelled the credit card payment. It was that easy! And it was from a stolen credit card number so you can never get it back.”
Bitcoins and many other digital currencies have public keys and private keys. The private key is a secret number that allows someone to access his or her cryptocurrency.
Whoever has the private key controls what’s in an electronic wallet.
Cluley said there were “lots of reports of folks losing a small fortune (and sometimes a large one) … following the loss of their private keys.”
Sometimes the method by which bitcoins are lost remains a mystery years later.
Tom Curry, who is a home builder in Massachusetts, still remembers his chagrin the day in 2013 when he lost 996 bitcoin, which at today’s prices would be about $9.2 million.
“I woke up at 5:30 or 6 in the morning and I got a text message: ‘All the bitcoins have been removed from your wallet,’” Curry said. Someone had gained access to his account and his private key.
Curry bought the bitcoins for a few bucks each, he said, and still rues what they would be worth today if he hadn’t been ripped off.
“I would no longer be doing construction. I would be in the Caribbean, that’s a definite,” he said in a telephone interview.
If a digital currency owner loses a private key – say, storing it on a laptop that melts down, or simply forgetting it – the bitcoins are essentially frozen in an electronic limbo.
“Let’s say a guy dies and he never gave his wife the private keys, and she doesn’t know how to move that crypto,” Fanusie said. “She’s a millionaire in crypto but with no way to get it.”
Fanusie said problems around securing and managing private keys for electronic wallets is a major drawback to digital currencies, harder than dealing with ordinary passwords.
“For cryptocurrencies to grow in adoption, someone’s going to have to figure out a better way for private key management, a way that’s more user friendly. Right now, that just doesn’t exist,” Fanusie said.
One solution is to store digital currency in a hardware wallet, a physical device a bit larger than a USB flash drive, which is not connected to the internet, kept in what industry experts call cold storage. Only when the hardware wallet is plugged into a computer can the currency be accessed.
The crypto promoter who suffered the loss of digital currency on an April 16 livestream is Ian Balina, a former IBM analyst who has drawn tens of thousands of followers on his YouTube and Telegram channels. Balina later tweeted an explanation.
“I ended today’s live stream b/c I am being hacked,” Balina wrote. “I’m not worried about the money. I learned my lesson. I only care about catching the hacker.”
Balina said in a May 2 tweet that he’d gone to the FBI and “we believe to have identified the hacker(s). Funds recovery is a super complex situation. When dealing with folks outside the US, the process can take a while.”
Balina did not respond to inquiries about the incident.