As innovative and advanced as blockchain and cryptocurrency are, there are a number of risks that someone runs when they choose to invest in these assets through an exchange. One of the most important and prominent risks that’s been headlining the news lately is the threat of hacks, security breaches, and theft. As quick as you can receive cryptocurrency when you purchase it, you can lose it all even faster if you don’t protect yourself. In fact, there have been tons of large-scale exchange hacks that have discouraged many from investing. Let’s go over some of the largest exchange hacks in crypto history and how you can protect yourself from anything like this.
This is not financial investment advice.
This article will discuss key aspects of some of the largest cryptocurrency exchange hacks in recent history.
In this article
- The Mt. Gox Hack
- The DAO Hack
- The Bitfinex Hack
- The BitFloor Hack
- The Bitstamp Hack
- How Can I Protect Myself?
The Mt. Gox Hack
One of the most well-known hacks in the crypto world, the Mt. Gox exchange hack is remembered as being the first event that shut down the — at the time — largest Bitcoin exchange in the world. The gradual destruction of the exchange started with the security breach and theft, ending in the inevitable filing of bankruptcy by the exchange. So how can one hack completely shut down a fully functioning cryptocurrency exchange?
Well, the Japan-based Bitcoin exchange had been operating since 2010 and was the biggest Bitcoin exchange at the time. The two hacks that subsequently occurred combined to destroy the exchange. The first one happened in the month of June in 2011, when the hacker was able to get ahold of Mt.Gox’s auditor’s credentials and transfer over 2000 Bitcoins to an address for which Mt. Gox had no keys. Unfortunately, the second attack in 2014 completely sunk the exchange. Mt. Gox halted operations and filed for bankruptcy, stating that more than 750,000 BTCs (around $350 million) were missing from the exchange.
The DAO Hack
Next, we have the DAO attack which — although not an exchange — resulted in the loss of more than 3.6 million Ether. A DAO is a decentralized autonomous organization. Its goal is to codify the rules and decision-making apparatus of an organization, eliminating the need for documents and people in governing, creating a structure with decentralized control. In this case, “The DAO” is the name of a particular DAO, conceived of and programmed by the team behind German startup Slock.it — a company building “smart locks” that let people share things including cars, boats, and apartments in a decentralized way.
Unfortunately, while programmers were working on implementing safety protocols to minimize the chances of any security breaches, an unknown attacker began draining The DAO of Ether collected from the sale of its tokens. Then, on June 18th, the attacker managed to drain more than 3.6 million Ether into a “child DAO” that has the same structure as The DAO. The price of Ether dropped from over $20 to under $13 as a result of this hack and the investors who had graciously given up their Ether in support of the project were left with nothing.
The Bitfinex Hack
Moving onto the next hack, we have the infamous Bitfinex crypto exchange heist. This is known as the second largest Bitcoin hack ever made, only behind the Mt. Gox breach in 2011. In this case, over 120,000 BTC was stolen from the online exchange. At the time, it was equivalent to a whopping $72 million! It happened because attackers were able to exploit a vulnerability in the multisig wallet architecture of Bitfinex and BitGo.
Fortunately, the victims of the hack weren’t left with nothing at all. Instead, Bitfinex issued BFX tokens for victims that were redeemable in USD, and hence, most of their investors were refunded their money eventually. Although they were refunding their users in a slow but gradual timeframe, it allowed them to stay in business and continue functioning. Today, Bitfinex continues to operate and currently has one of the largest BTC/USD volumes in the crypto world.
Furthermore, another cryptocurrency exchange hack that ended the career of that platform is the BitFloor hack. This occurred back in 2012, when hackers were able to gain access to the unencrypted private keys that were kept online for backups. As such, the hackers were able to get away with roughly 24,000 BTC, which is significantly less than that of other hacks like Mt. Gox & Bitfinex. Yet, this was still large enough to completely shut down the exchange which had to do with bank regulatory measures.
As a result of the hack, BitFloor made the decision to gradually refund its users and promised restitution. The hackers were able to steal close to $250,000 worth of BTC (at the time of the hack), leaving the exchange with a large amount of capital to make up for if they sought restitution for their users. However, according to the company, BitFloor’s banks had ceased doing business with the startup and customers never saw their funds again.
Last but certainly not least, we have the Bitstamp hack which took place in January of 2015. Ironically, this Slovenian Bitcoin exchange startup was founded in 2011 as an alternative to Mt.Gox. Unfortunately for Bitstamp, it still found a way to make it onto this list which means that it definitely wasn’t a safer alternative to Mt. Gox, as it was also hacked a few years after. An anonymous hacker was able to gain access to the operational hot wallet of Bitstamp and managed to steal 19,000 Bitcoins (worth of $5 million at the time).
Soon after the incident, Bitstamp suspended all operations and dealt with the situation at hand. Today, Bitstamp still continues to operate and has been able to win back the trust of users. Since the hack, it has acquired stringent security measures like BitGo multisig wallets for operational purposes.
How Do I Protect Myself?
There’s no need to fear, though, because keeping your digital assets secure and out of harm’s way has never been easier. Thanks to multiple security breaches and hacks like the ones listed above, the cryptocurrency community has spent sufficient time developing and advancing today’s crypto storage systems. With that being said, it’s important to realize that keeping your assets which you’ve purchased from an online exchange on that exchange is not the most secure way to protect your valuable investments.
Instead, it’s best to keep your coins stored securely in any kind of wallet — whether it be hardware, software, or even paper. Today, there is ample information readily available for any investor who plans on purchasing cryptocurrency, so there isn’t much of an excuse to blindly handle your private keys or public addresses. In order to minimize the chances of a security breach or hack, you should store all of your assets in a software or hardware wallet outside of the exchange.
And as always, continue to stay up to date with our articles to get the best educational content regarding cryptocurrency and blockchain.
The security of your digital assets has never been more important than it is now, especially considering how expensive some of these recent hacks have been. Let’s face it, it seems as though you can’t go a week without hearing about some negative news about cryptocurrency revolving around its security and stability. As a result, it is our job as intelligent investors to take every precaution necessary to ensure the full safety and protection of our coins. Thus, if you invest in coins from a centralized cryptocurrency exchange, it’s best to store them in a wallet that is separate from the platform. This will minimize the chances of potential hacks or security breaches which could impact your portfolio. As always, happy investing!
What are some other notable cryptocurrency exchange hacks that you remember? Let us know in the comments!