When a minor South Korean cryptocurrency exchange Coinrail announced that 30 percent of its holdings customers trusted the company with was stolen by a hack; the entire industry suffered.
Estimates suggest Coinrail and its customers lost the equivalent of $37 million USD. However, the impact on the value of other cryptocurrencies was substantial as almost all values went down significantly over a seven-hour period after the hack was made public.
Slate reported that the estimated total impact on the price of all cryptocurrencies was a reduction equivalent to about $30 billion USD. All that value was lost in a matter of less than one-third of a day. To make matters worse, the third-largest South Korean cryptocurrency exchange, Bithumb, was hacked next on June 20, 2018, resulting in a loss of about $30 million. This caused an additional loss of the total market value of another $17 billion according to CCN.
This is a systemic problem with cryptocurrencies, and it has happened before. Hackers successfully attacked other exchanges to steal ungodly amounts sums of digital dollars. Slate says that an exchange in Japan called Coincheck lost the equivalent of $500 million USD to hackers and another exchange in South Korea called Youbit had to file bankruptcy when so much of its cryptocurrency was stolen.
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The Problem with Cryptocurrency Anonymity
Cryptocurrency is, by design, semi-anonymous. One of the main attractors when people started first using Bitcoin, was that the ownership of Bitcoins was hard to track. Of course, this meant that Bitcoins were used by criminal elements for illicit transactions. Now, this same feature makes cryptocurrencies attractive for criminals to steal. By hacking an exchange, criminals can steal something that is essentially not traceable back to its rightful owner.
The False Sense of Security from Encryption
Encryption is used to make cryptocurrency secure. The only one that should be able to open a digital wallet that holds cryptocurrency is the one possessing the correct encryption key. The problem with making a transaction on a cryptocurrency exchange is that the ownership needs to be changed, and that means opening the digital wallet to alter the encryption key from the seller to the new owner.
Suddenly, the security provided by encryption disappears because the exchange needs to know the old encryption key and the new one of the buyer in order to process a transaction. This vulnerability is what criminals have effectively used as an exploit to gain illegal control over huge sums of cryptocurrencies.
Cryptocurrency is somewhat like cash, in that possession of it is ownership. However, unlike cash, an unrelated cryptocurrency industry incident can cause a sudden major loss of value across the board. Investors need to be aware that the volatility risks are extremely high because a security breach can happen at any time. Buyers beware.
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