Pagoda Blog


The Basics of Bitcoin and What It Means for Cybersecurity

July 20, 2017

Bitcoin has been credited with revolutionizing and democratizing money production and has been accused of abetting illegal sales on the Black Market. In March 2017, the online currency’s value ($2,637.82 at the time of writing) even surpassed the value of an ounce of gold ($1,237).

 

For such a young currency, Bitcoin has made an inescapable splash across the world and it seems that influence is only increasing. As more people choose to use Bitcoin and as more companies choose to accept it as payment, we should all understand what exactly Bitcoin is, how it works, and what it means for cybersecurity.

 

What is Bitcoin?

Bitcoin is a decentralized online currency created in 2009 by an unidentified person or group using the alias Satoshi Nakamoto. To make bitcoin transactions, you don’t need a middleman, such as a bank or credit card company. All transactions are made online and are managed by a public network of individuals. There are no setup fees, prerequisites or spending limits, and it can be used in every country. While these are all very enticing features, perhaps the most alluring aspect of bitcoin is the ability to remain completely anonymous.

 

How Does Bitcoin Work?

To start using bitcoin, you first set up a digital wallet that’s assigned a random number. This is your bitcoin identity. It’s not attached to your name or any other personal information, making bitcoin the currency of choice for illegal transactions like drug deals, money laundering, or cyber crime.

 

The currency runs on a set of distributed public ledgers called a blockchain. Blockchain is run by a network of individuals (referred to as miners) who are responsible for ensuring the legitimacy and security of all bitcoin transactions. Legitimacy is checked through a complex calculation that verifies all recorded transactions for that particular block. (You can think of a block as a folder full of bitcoin transactions.) If the calculation checks out, the miners then encrypt the block so that no one can go back and alter its contents. This prevents users from trying to spend bitcoins that have already been spent in a previous transaction. (This is the equivalent of preventing someone from using the same paper check to pay more than one person.)

 

For a detailed breakdown of how a blockchain works, check out The ultimate 3500-word guide in plain English to understand Blockchain by Mohit Mamoria.

 

Who Uses Bitcoin and How Do I Buy It?

According to the University of Cambridge, bitcoin has up to 5.8 million users in the network. Anyone can buy bitcoin using dollars or euros or you can earn bitcoins by becoming a ‘miner’--the individuals who monitor the bitcoin transactions, and produce bitcoin currency, by completing complex math equations with high-powered software. (This is a very simplified explanation of a miner. For a more detailed breakdown of bitcoin mining, read How Bitcoin Mining Works.)

 

How Does Bitcoin Affect Cybersecurity?

The best aspect of bitcoin, the fact that it’s decentralized, could also be its downfall. The anonymity of the bitcoin wallets, and the ease and security in which users can transfer currency from one user to the next, opens the gateway for cyber criminals. Unlike a wire transfer between banks that must be done manually, for instance, a bitcoin transaction can be automated, allowing cybercriminals to launch larger-scale attacks with higher profit and less risk.

 

For example, ransomware attacks, (where a hacker takes a server’s data hostage and won’t release it until the owner of that data pays a ransom), are only made easier with bitcoin. The hacker can demand payment be sent to multiple bitcoin wallets, each with a unique code, making it very difficult to track down the original sender. Once payment is sent, the hacker sends you a piece of code that is supposed to decrypt your files.

 

What if you don’t have a virtual bitcoin wallet? That’s only a small hiccup--anyone with a computer can quickly download bitcoin software and buy bitcoin using U.S. dollars or euros. The hacker simply has to provide the instructions for you to do so.

 

It’s also surprisingly easy to convert bitcoins into a more widely accepted currency. “If you have the skills to get an iTunes account you can probably download a ransomware toolkit, an automated bit of software, and start distributing it,” says David Prince, a cybersecurity specialist and a director at Baringa Partners, a London-based tech consultancy. “You can then go on the darknet and ‘wash’ your bitcoins and convert them back into cash.”

 

The WannaCry ransomware attack in May of this year only hinted at the malicious potential for this type of criminal activity with an online currency like bitcoin. (The WannaCry attack demanded just $300 in bitcoin to decrypt the corrupted data.) As bitcoin increases in value and as more individuals and companies invest in larger quantities of bitcoin, hackers will demand a higher ransom. In fact, Dr. Simon Moores, a former technology ambassador for the UK government and chair of the annual international e-Crime Congress, says big banks are stockpiling bitcoin as ransom reserves.

 

Bitcoin, of course, isn’t the only reason cyberattacks are gaining power. With the exponential increase of devices that are connected to the internet, otherwise known as the IoT (internet of things), hackers have more ways into our data systems than ever before. We’re all becoming increasingly exposed to cyber attacks and with bitcoin, it’s become much easier for cybercriminals to make a profit and much harder to track down the culprit.

 

So, should you invest in what many are calling the currency of the future? For many businesses, bitcoin is an affordable way to conduct transactions and as long as the majority of the miners stay honest, your money is in safe hands. Just be wary of putting all your eggs in one basket. For now, cash is still the dominating currency and although we know even the biggest banks can fail, storing all your investments in the cloud comes with its own set of risks.

 

Related posts:

 

7 Cyber Security Myths Debunked

How Hackers Used the Internet of Things to Launch the World’s Largest Cyberattack

 

 

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