Whether it’s Bitcoin, Ethereum, or a slew of industry peer competitors in between, the main appeal of cryptocurrency is that it’s unregulated by the government or central banking system. On the one hand, that makes it highly attractive, as it’s less affected by the ebb and flow of the economy and transactions can be made quicker. On the other, it raises a security and regulatory issue that until recently, has flown somewhat under the radar.
With so much data stored on the internet, cryptocurrencies are inherently vulnerable to hacker attacks. At their core, they’re designed to be accessed by those with the computer knowledge to professionally and ethically crack the code protecting the assets, gaining access to the units. If you can solve the incredibly complex computational code, you’re rewarded with a cleared transaction equal to its worth. Though there has been some pushback and controversy surrounding this approach, with some critics claiming that the rich are the only ones who can afford the highly technical computer systems required for code-breaking, it remains the primary means of bitcoin wealth building outside of private buying, trading, and selling.
Yet, a recent incident has shed some light on the vulnerabilities built into the cryptocurrency system. On January 26, hackers infiltrated a Japan-based cryptocurrency exchange company known as Coincheck, stealing around 58 billion yen, which equates to around $532.60 million. Self-proclaimed as the largest bitcoin and cryptocurrency exchange in Asia, Coincheck reported that the hackers weren’t going after the more popular digital currencies, but rather NEM, a lesser-known currency that stands for New Economy Movement.
Founded in 2015 by a team of five developers, NEM is now ranked in the 10th spot in the list of the world’s top cryptocurrencies. There is roughly $9 billion worth of NEM assets circulating today, with prices falling right under $1 per coin.
Rather than require computers to solve codes to access the currency, NEM is based on account status alone. How much your account is worth depends on what its balance is, who you enter into transactions with, and how often you perform transactions.
What Happened?
While some details remain unclear, Coincheck’s COO Yusuke Otsuka reported that 523 million NEM coins were sent around 3:00 a.m. that morning. A few hours later, the company noticed a sharp decrease in funds.
One of the reasons Otsuka believes the hack occurred? The funds were stored in what’s known as a hot wallet versus a cold wallet. In short, hot wallets are ones that are directly connected to the internet, making them vulnerable to hacker attacks. On the other hand, cold wallets are akin to USB devices, which can store large amounts of data, but can be taken offline and stored somewhere secure, like a safe.
Otsuka also noted that a decline in staffing, as well as technical issues, may have contributed to the penetrable point.
To mitigate damages, Singapore-based NEM.io Foundation, an organization devoted to NEM technology, is tracking the stolen coins on a shared blockchain ledger. It plans to create an automated tagging system to keep tabs on where the coins end up, and which account (if any) receives them. As for now, the organization assures, the hacker has not moved any of the funds.
What Can Investors Learn?
While this incident presents its share of questions and concerns, it shouldn’t serve as a white flag warning to give up any shares of cryptocurrency you currently have, or to abandon existing efforts to mine and trade within the system. In fact, market predictions foresee altcoins like Ethereum having a one-year upside price potential of more than $1,500 However, wise investors are ones that will use the Coinbank hack as an eye opener to reassess how they’re obtaining, managing, and storing their funds.
Some experts will argue that centralized exchanges themselves play a major role in this vulnerability, acting as an unnecessary third party that could amp up risks of mismanagement. Still, others are quick to caution that only immediate funds needed for transactions should be kept in a hot wallet. Otherwise, store all data offline, where it’s protected from hacker access.
Better yet, you can store your funds in a decentralized exchange such as Shapeshift, with funds moved directly from your wallet without the use of an Exchange-connected system. You can also perform peer-to-peer exchanges in reputable locations backed by the local crypto community, only hopping online long enough to perform the actual transaction.
The cryptocurrency market isn’t without its shortfalls, but it can prove a massively successful undertaking if performed correctly. The key is to follow regulatory guidelines and err on the side of caution when making any decision that can affect your bottom line or the entities that protect it.