Despite all of the efforts put into prevention and security, the biggest threat against Bitcoin has always been a major hack. This could be seen in what happened when Mt. Gox was allegedly hacked, with even minor data breaches in smaller exchanges causing the value of the digital currency to take a dip.
Bitcoin enthusiasts may talk about legalization and regulation, but a major hack often devalues Bitcoin a lot, reducing the confidence in the cryptocurrency. This is why the latest hack on Bitfinex is such bad news.
How the hack happened
Piecing together what happened can help give people an idea of what the Bitcoin world is facing. Bitfinex is a Hong Kong-based Bitcoin exchange that focuses mainly on the Chinese market. Considering that China’s Bitcoin investors are one of the main reasons behind the rise of the Bitcoin value for the past few months, an attack on a Chinese Bitcoin exchange was to be expected.
It all started last Aug. 2 when in the early morning, several transactions were made to transfer a large amount of Bitcoin from the exchange, amounting to nearly 120,000 BTC or $60 million. This transaction was noticed only nine hours later.
When the news broke, Bitcoin was priced at $605. A few hours later, the Bitcoin price fell to $460. By then, the admins at Bitfinex have shut down all trading to the site to stop continued access and to begin their investigation.
One of the insights produced by the investigation is that the vulnerability that allowed the hack could be traced to how Bitfinex structured its accounts and its use of Bitcoin wallet provider, BitGo. This was supposed to add a layer of security by requiring multiple signatures for large transactions, but the hackers still managed to sneak in.
Dealing with the repercussions
The question of how may be of interest to security experts, but what is really on the mind of many Bitcoin enthusiasts’ mind is how it would affect them.
The primary effect it has is that it can reduce Bitcoin’s value. This has been reflected when the prices of the cryptocurrency dipped down below the $500 threshold. This reflected over a 12-percent loss in value. Fortunately, Bitcoin managed to recover fast, but not to previous levels.
There is still bad news to come. With 119,756 BTC stolen, Bitfinex would have difficulty fulfilling its financial duties. To avoid collapse, the exchange decided to spread the loss around its account holders.
This prompted the Bitcoin exchange to announce on Aug. 6 that all customers will be losing around 36-ointer of their Bitcoin assets. Customers, however, will be compensated by receiving a token from the company, allowing them to exchange it for shares of the company behind Bitfinex and iFinex Inc. They are still ironing out the details.
As of now, Bitfinex has already reopened its doors to the public with limited functionality. Features will be added in the coming days as well as increased security.