Risks of Bitcoin

Not only is Bitcoin a volatile market, and even if you have some knowledge of trading, most exchanges do not have adequate security in place. This has been proven in the past, and will be proven again and again in the future.

First Published 18th May 2016

Risks of Bitcoin

Choose your exchange wisely.

2 min read  |  Reflare Research Team

This week, one of the bigger Bitcoin exchanges was hacked and suffered a loss of $2 million. Gatecoin is a Hong Kong based cryptocurrency exchange that announced it was taking down its site to investigate a recent breach and promised to refund customers. While the site-owners acted responsibly and shut down the site as soon as the breach was discovered, the Bitcoin exchange had already lost a significant amount of money before they could mitigate damages.

Although Gatecoin was one of the bigger exchange agencies, it's still a type of "banking" that's unregulated. This hack highlights the unfortunate misunderstanding that IT and software development skills automatically mean that the employee or contractor is a security expert. In fact, security expertise is a completely separate set of skills compared to IT and development expertise. Cryptography, as it is used by cryptocurrencies, is one of the hardest to understand aspects of security.

Regular banking is one of the most regulated industries around the globe. Therefore, cryptography related to banking is usually properly implemented. However, with Bitcoin, you run the risk of entrusting your money with an unregulated, possibly poorly secured agency.

To put it more clearly, would you entrust millions of dollars to someone building their own bank in their basement? If the answer is "No," then why would you entrust your money to an unknown IT person using his own server that could be located anywhere in the world? Bitcoin is an anonymous method for payment, so you could potentially be entrusting your money to someone with very poor security, infrastructure, and resources.

Security and cryptography should only be left to people who understand the technology. Bitcoin technology is still in its infancy. Both the currency itself as well as the ecosystem surrounding it are in constant flux. Before you entrust too much money to unregulated markets, consider that your money is not very safe. For corporate purposes, cryptocurrencies should be treated like an unregulated, unstable asset from a potential conflict zone.

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