How Will Bitcoin Overcome Its Biggest Test?

Following the impressive rise of the Bitcoin digital currency over the past few years, criminals are stepping up their game.

If you’re unfamiliar, Bitcoin is an open-source software code that offers a person-to-person (P2P) monetary exchange with no central servers. It uses mathematics, cryptography, and blockchain technology to facilitate transactions easily, quickly, and securely.

Users store a collection of keys ─ an e-wallet ─ on their computer for saving, sending, and receiving payments through the Bitcoin network. Transactions are protected by highly encrypted algorithms.

Unlike traditional currency, Bitcoin isn’t regulated by a central authority. That’s the appeal – it’s free from the meddling and manipulation of central banks.

Anyone can “mine” Bitcoins by solving algorithms that are available to the public. But this is regulated through in-built technology. As a user learns to “mine,” the process becomes increasingly difficult – so much so that Bitcoin mining is reduced by roughly 50% every four years and it’s impossible to exceed the existence of 21 million Bitcoins in circulation at any given time.

But as with any digital content these days, Bitcoin is vulnerable to cyber criminals willing to exploit security vulnerabilities in the system.

Bitcoin Bandits

Soon after Bitcoin’s launch in 2009, the creators of malware giant Zeus Botnet began using the currency for transactions. WikiLeaks and countless drug trafficking sites also revealed their adoption of Bitcoin.

Bitcoin’s P2P network makes it difficult to detect criminal transactions, discover the identity of users, or acquire transaction records of illicit money transfers.

In case of breaches, security companies are typically able to provide an electronic trail, which the law uses to trace activities in the real world and locate criminals. However, by leveraging the decentralized Bitcoin system, criminals are less detectable in both the virtual world, as well as the real world, making prosecution more difficult.

And, this issue applies to all cryptocurrencies, not just Bitcoin. Recently, cyber criminals began using a currency called Liberty Reserve (LR), which offered users a platform for transferring funds to other users with just their email, name, and date of birth as proof of identity.

But no effort was made to validate the identities used, no limits were set on the transactions, and most forms of deposit were honored. A money-laundering paradise!

In May 2013, the U.S. Department of Justice charged LR with laundering $6 billion, and its founder was arrested along with six others. According to the New York Southern District Court attorney, “Liberty Reserve was intentionally created and structured to facilitate criminal activity; it was essentially a black market bank.”

But because of its vast legitimate uses, Bitcoin remains the digital currency leader.

Bitcoin Users Unite

The security team at IBM’s Security Intelligence Division recently came across a discussion in a closed Russian cyber-crime forum in which members debated the use of different virtual currencies, secure transactions, and Bitcoin.

The thread included a discussion on users’ preferred money exchanges to make secure online transactions, as well as the volatility of Bitcoin.

The key takeaway was that while all members were obviously concerned with security, they were all avid supporters of virtual currencies.

And given its status at the forefront of the digital currency industry, supporters dominated the conversation. They highlighted the ease with which transactions can be made, the increased security measures available to them, and Bitcoin’s increasing adoption rate among merchants.

Indeed, the number of merchants who accept Bitcoin has risen to over 100,000 last year. That includes Microsoft Corp. (MSFT), PayPal, and Expedia Inc. (EXPE) – proof that far from being just an upstart, Bitcoin is actually moving to the mainstream.

The members also dismissed Bitcoin’s volatility. Noting that while the digital currency may go down in value, they usually regain their value and eventually become more expensive.

That being said, with increasing interest in Bitcoin from businesses, entrepreneurs, private users, and cyber criminals, security threats will continue to grow, too.

The Future of Cryptocurrency

But despite this, analysts and investors continue to laud Bitcoin.

And as various Bitcoin-related startups and partnerships come online, greater consumer safeguards are also coming onto the market.

And while the inherently cryptic nature of Bitcoin makes it difficult to back-up or insure, there are implementations that could provide users more confidence. For instance, Wall Street Daily correspondent Shelley Goldberg recently reported on how the Ethereum network allows users to create cyber contracts where they can regulate and understand transactions.

These smaller companies, like Ethereum, are incredibly valuable as cryptocurrencies continue to grow. They offer viable alternatives and competition to Bitcoin.

Additionally, with Bitcoin’s value fluctuating – from $13 to higher than the price of gold in November 2013 – following major related events, such as the shutdown of Tor-based drugstore Silk Road or the attacks on major exchanges, contracts will become even more important for the average user.

As with any investment, it’s crucial to understand the pros, cons, and risks before getting involved – either as a user or investor. And that’s particularly true in the growing, but still murky world of digital currency.

Good investing,

Sarah Adler

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TheBitcoinNews.com – leading Bitcoin News source since 2012

Virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to consumer protections. The information does not constitute investment advice or an offer to invest.