Is cryptocurrency secure? It’s ironic to even have to ask the question. The original cryptocurrency, Bitcoin, was produced using a digital algorithm, and early adopters were assured that it was un-hackable. The logic used to create that algorithm involved very high-level encryption, such that the computing power to create it was an enormous energy sink. Yet it seems that almost every week there is a report of a breach in which cryptocurrency is stolen. What went wrong?
Cryptocurrency uses a concept called “blockchain.” Simply, this is a digital ledger where all records have a unique signature, and all of those records link to each other. Yes, the reality is far more complex, but at its core, that’s all there is to it.
Let’s agree to ignore the question of whether cryptocurrency (aka crypto) is the next evolutionary step in finance or a massive Ponzi scheme. Instead, let’s examine the ways in which crypto is problematic when held up to a security spotlight.
First and foremost, crypto is not anonymous. Your “crypto wallet” is really just a string of digital characters, but it can be traced back to you. This is done using the same forensic techniques security professionals (and hackers) employ to track down breaches, network intrusions and online theft. It’s not trivial to find out who owns crypto and how much, but it’s doable.
The next problem is your crypto password. Unlike the usual online passwords, which can be retrieved with an email message or security question, a crypto password cannot. Because crypto is decentralized (no single authority runs it), you have nowhere to turn if you misplace that string of characters.
Imitation is the sincerest form of flattery. Originally only one form of crypto existed in Bitcoin. Since then hundreds of competitors have sprung up, and many have withered and died already. Folks who bought into some of these now-gone schemes are generally out of luck.
The rise of crypto exchanges, where a company brokers your transactions, has meant many more average citizens now trade crypto. The regulation of these third-parties, however, is nonexistent. Federal and international law has not kept pace with this rapidly expanding form of business. This means that shady operators can throw up a website, get money from one and all, then either disappear or pay out far less than what the crypto is actually worth. Unless you can monitor the real-dollar value of your crypto holdings independently of the broker, you are at their mercy.
Even without a broker in the picture, crypto can be stolen. This has happened hundreds of times since the dawn of the technology. If it is so secure, how is that possible? Like anything digital, from a hand-held calculator to the Large Hadron Collider, at the heart of things it’s just bits. Millions and billions of ones and zeros, to be sure, but all built on those two values. Spend enough time and mental energy, follow the path back from the end-result, and you are almost guaranteed to find a way to circumvent the most stringent encryption or locks.