Site icon Coupontoaster Blog

Dangers and Technological Risks in Cryptocurrency – Beware

Marcus Chan
Hidden Dangers and Technological Risks in Cryptocurrency

Cryptocurrencies are like new, digital types of money. They can do some pretty cool things, but they also come with risks. First off, there are hackers. Imagine someone sneaking into your digital wallet where you keep your crypto coins—that’s what hackers do. They find weak spots in the security of places where people trade or store cryptocurrency and steal their money. Then there are the scams, which are pretty common too. It’s like someone offering you a chance to invest in a magic bean that grows a money tree, but once you give them your money, they disappear. These scams often promise you big profits with no risk but end up just taking your money.

So, while cryptocurrencies can be exciting and offer new opportunities, they’re not without their dangers. It’s like exploring a new city; you need to watch out for both the amazing sights and the risky spots. Always make sure you understand where your money is going and who you’re dealing with.

Hacking and Security Breaches

Hacking and safety breaches are massive threats to the cryptocurrency ecosystem. Hackers target cryptocurrency exchanges and wallets to exploit vulnerabilities and tight budgets. These assaults may have devastating consequences, leading to great monetary losses for people and corporations. Cryptocurrency customers must prioritize security by using reputable wallets and exchanges and implementing strong protection practices.

One of the most common hacking strategies used against cryptocurrency is phishing. Phishing assaults involve tricking users into revealing their private keys or passwords, allowing hackers to gain unauthorized access to their wallets. Another not unusual technique is malware, which could infect gadgets and scouse borrow cryptocurrency keys. These assaults underscore the significance of keeping up-to-date protection software programs and being cautious of suspicious emails or links.

Crypto exchanges, where people buy, sell and store their crypto, are popular targets. Some of the most high-profile hacks include:

Numbers provided by profit-edge.com

Various cryptos stolen from Individual wallets are also frequently targeted. Phishing scams trick users into handing over the private keys to their crypto wallets. Malware can infect computers and drain crypto accounts. Certain blockchains have proven vulnerable to 51% attacks, where hackers gain majority control of a network’s mining power and can then manipulate transactions.

Do You Know: In January 2024 that stole approximately $112 million worth of XRP from Ripple co-founder and chairman Chris Larsen’s personal wallets. This was not an attack that crashed or compromised the official XRP platform or blockchain.

While these wallet hacks are significant security breaches affecting XRP users, they do not constitute an attack that crashed or compromised the official XRP platform or blockchain. The XRP team and security experts investigated the incidents but found no evidence of a core code vulnerability.

CEO of @bitfinex on JAN 15 iformed that unsuccessful hacking attempt on the XRP Ledger, where hackers targeted nearly $15 billion worth of $XRP.

Do you know: The most notable incident described was a widespread hack in August 2022 that drained funds from approximately 8,000 digital wallets, including those using the Solana browser wallet Phantom. The attack exploited vulnerabilities in certain wallet software rather than the Solana blockchain’s core code.

Smaller blockchains with fewer miners are at higher risk of 51% attacks. Smart contract vulnerabilities are another common exploit. Since smart contracts are immutable once deployed, any bugs or security holes are permanent until the entire contract is rewritten and replaced. Hackers work to find these vulnerabilities and drain funds.

Cryptocurrency’s technological complexity makes strong security practices essential for everyone. Yet many investors don’t take proper precautions to secure their holdings, leaving them vulnerable to theft.

February was another huge month for #ETH and EVM hacks On top of large protocol hacks that totaled over $360 million:

Over 57k users affected, $47 million in wallet drains Nearly all issues would be impossible on non-EVM chains

Using hardware wallets, enabling 2FA, OTP enabled, triple-checking addresses and other security measures can help mitigate risk but don’t eliminate it entirely.

Scams and Ponzi Schemes

Cryptocurrency scams and Ponzi schemes are rampant within the virtual foreign money space, concentrated on unsuspecting investors seeking to profit from the market. These fraudulent schemes regularly promise high returns with little to no threat, attracting people to invest their cash. However, many of these schemes are designed to defraud traders, leading to financial losses and reputational harm.

One common kind of rip-off is the ICO (Initial Coin Offering) rip-off, where fraudulent initiatives improve the budget via a token sale but have no aim of handing over a service or product. Another normal scam is the Ponzi scheme, wherein early buyers are paid with the cash of the latest traders, developing a fake feel of profitability. These scams spotlight the importance of due diligence and research before making an investment in any cryptocurrency mission.

Real World Case Studies:

  1. CryptoFX Scheme: Do you know about the CryptoFX scheme? It targeted over 40,000 Latino investors by promising them a safe way to make lots of money through crypto and foreign exchange trading. The organizers didn’t actually invest the money; instead, they paid early investors with money from newer investors, which is the classic Ponzi scheme trick. This scam caused around $300 million in losses before the SEC stepped in and charged the people responsible​ (SEC.gov)​.
  2. HyperFund Scheme: Have you heard of HyperFund? It was a huge scam that raised more than $1.7 billion. The scheme lured investors with promises of high returns from supposed crypto mining activities. However, it turned out to be a pyramid scheme where the money from new investors was used to pay off earlier ones. This scam collapsed in 2022, leaving many investors unable to get their money back​ (SEC.gov)​.
  3. David Kagel’s Scheme: Let me tell you about David Kagel. He was a disbarred attorney who ran a $9.5 million crypto Ponzi scheme. Kagel and his partners promised big returns through AI-based crypto trading but ended up using the money for their personal expenses. This scam tricked many people into thinking their investments were safe, but it all fell apart when the authorities caught up with them​ (UPI)​.
  4. Circle Society Scheme: Another big one was the Circle Society scam. Two men, David Saffron and Vincent Mazzotta, convinced investors to put money into fake crypto trading programs. They promised high profits using an AI trading bot, but instead, they spent the money on luxury items like private jets and mansions. This scam ran up to $25 million before the Department of Justice intervened and charged them with multiple crimes​ (Justice.gov)​.

These stories show just how important it is to do your homework and be cautious when investing in cryptocurrencies. If something sounds too good to be true, it probably is!

Lack of Regulation and Consumer Protection

One of the biggest dangers currently with cryptocurrency is the overall lack of regulation and consumer protections compared to traditional financial markets and institutions. Crypto largely exists outside the bounds of government oversight. There are few rules or safeguards in place. This Wild West environment opens the door to scams, fraud, market manipulation and predatory practices that exploit unsuspecting investors. Without regulatory bodies monitoring the space, bad actors can operate with little accountability.
If an investor gets scammed or a crypto exchange gets hacked and funds are stolen, there is often little recourse available. Transactions are irreversible and recovering lost or stolen funds can be nearly impossible.

Here are some examples of cryptocurrency exchanges and sites that suddenly closed down, leaving investors in the lurch:

  1. QuadrigaCX: Have you heard about QuadrigaCX? This Canadian crypto exchange shut down in 2019 after its founder, Gerald Cotten, died suddenly. It turned out that he was the only one with access to the exchange’s cold wallets, which held around $190 million worth of customers’ funds. After his death, the money was nowhere to be found, leading to suspicions of fraud and leaving thousands of investors without their funds​.
  2. Cryptopia: Another example is Cryptopia, a New Zealand-based exchange that was hacked in January 2019. The hackers stole about $16 million worth of cryptocurrencies, and the exchange couldn’t recover from the loss. Eventually, it went into liquidation, leaving users struggling to get their money back.
  3. Mt. Gox: You probably heard about Mt. Gox, one of the earliest and most infamous cases. This Tokyo-based exchange was handling about 70% of all Bitcoin transactions worldwide when it suddenly filed for bankruptcy in 2014. The reason? It lost 850,000 Bitcoins, worth around $450 million at the time, due to a massive hack. The collapse left thousands of investors with huge losses and highlighted the risks associated with unregulated exchanges.
  4. BTC-e: BTC-e was another major exchange that closed abruptly in 2017. The U.S. authorities seized the site and arrested its alleged operator, Alexander Vinnik, on charges of money laundering and operating an unlicensed money service business. The exchange was accused of laundering billions of dollars, including funds from the Mt. Gox hack. Its sudden closure left many users unable to access their funds.

These examples show how lack of regulation and consumer protection in the crypto world can lead to sudden closures and massive losses for investors. Always be cautious and do your research before using any crypto exchange. Greater regulatory clarity and oversight are needed to help protect consumers and create a safer, more stable crypto market. However, achieving the right balance of innovation-friendly policies and essential public protections remains an ongoing challenge.

Software Vulnerabilities and Exploits

Software vulnerabilities and exploits are enormous dangers in the cryptocurrency environment, posing threats to the safety and integrity of blockchain networks and cryptocurrency software programs. Vulnerabilities inside the code may be exploited by using malicious actors to govern transactions, disrupt network operations, or steal budgets. Developers and blockchain initiatives should constantly monitor and cope with these vulnerabilities to protect against capability exploits.

One instance of a software vulnerability that brought about a prime advantage is the DAO (Decentralized Autonomous Organization) hack in 2016. A flaw within the DAO’s clever contract code allowed an attacker to siphon off hundreds of thousands of greenbacks’ worth of Ether. This incident resulted in a contentious hard fork of the Ethereum blockchain to oppose the exploit, highlighting the demanding situations of managing software program vulnerabilities in decentralized structures.

Unseen Software Bugs

Despite extensive testing and auditing, blockchains and cryptocurrencies are still vulnerable to unseen software bugs. Cryptocurrencies are powered by open-source codebases that are constantly being updated and tweaked. Any new software changes have the potential to introduce new bugs. On a blockchain, software bugs can lead to forks, downtime, erroneous transactions, double spending and theft. Since most blockchains are immutable, deployed bugs can be difficult to fix. Bitcoin has had some high-profile software bugs over the years, including:

Ethereum’s DAO hack (2016) is a prime example of unseen software bugs leading to catastrophic losses. The DAO was a smart contract-powered investment fund built on Ethereum. It raised a record $150 million worth of ether. However, a small bug in the code allowed hackers to drain funds. Around $60 million worth of ether was stolen before the Ethereum community controversially hard-forked the blockchain to restore funds.

Solana, a newer blockchain that has risen to prominence, has experienced multiple complete network outages due in part to software failures. In September 2021, bugs in the codebase allowed a flood of transactions to overwhelm and crash nodes, taking the entire blockchain offline for 17 hours.

In combination with blockchains’ immutability and decentralization, software bugs have led to numerous multi-million dollar crypto hacks and losses over the years. As more value flows into cryptocurrencies, the potential fallout from critical bugs only intensifies. Crypto codebases are getting more complex, as are the applications built on top of them, introducing more potential points of failure.

Extensive audits, bug bounty programs and rigorous testing are essential to minimize risks. However, some software bugs in cryptocurrency ecosystems seem unavoidable. Not all of them will be spotted before deployment. The irreversible and unstoppable nature of blockchain transactions and applications magnifies the impact when bugs slip through and get exploited.

51% Attacks on Smaller Blockchains

51% of attacks are a risk unique to cryptocurrencies due to their decentralized consensus mechanisms. In a 51% attack, a malicious actor controls most of a blockchain network’s hash power (mining power). This allows them to disrupt the network in a few key ways:

51% of attacks are generally seen as an attack on a blockchain’s immutability. They allow a bad actor to rewrite recent blockchain history. An attacker could spend funds on a cryptocurrency blockchain and reverse those transactions, allowing them to double-spend the coins.

Bigger blockchains with more hash power, like Bitcoin and Ethereum, resist 51% attacks because of the massive costs required to control most of the network. But smaller blockchains are at higher risk.

In 2018, several successful 51% attacks hit smaller cryptocurrencies, including:

In most cases, the attackers could rent hashing power on the open market to gain 51% control. Once in control, they typically deposited funds on a crypto exchange, traded them for another cryptocurrency, withdrew those funds and reversed the original deposit transaction. So the attacker keeps their original crypto while having the funds they traded for, allowing them to double spend.

Blockchains with smaller mining rewards tend to have less hash power securing the network, making a 51% attack more feasible. 51% of attacks undermine trust in a blockchain’s ledger. Experiencing a 51% attack can torpedo a cryptocurrency’s value.

Merged mining, where smaller blockchains inherit the hash power from larger ones like Bitcoin, is one way to gain 51% attack resistance. But it comes with some tradeoffs around control and centralization. Overall, 51% of attacks remain an ongoing risk for any proof-of-work-based cryptocurrency outside the few dominant ones.

The Threat of Quantum Computing

One of the longer-term technological risks to cryptocurrency is quantum computing. Quantum computers, still in early development, have the potential to break some of the cryptographic algorithms that blockchain technology relies on.

Specifically, many experts believe that quantum computers will eventually be able to crack ECDSA (Elliptic Curve Digital Signature Algorithm), which is used by Bitcoin and most other major cryptocurrencies to create digital signatures. These signatures provide the proof of ownership needed to spend funds. If quantum computers advance to the point where they can derive a user’s private key from their public key, which is theoretically possible with sufficient quantum computing power, then a hacker could forge transactions and steal funds.

Clearly, sufficiently advanced quantum computers are likely many years away and cryptocurrencies are already working on quantum-resistant upgrades to their signature schemes. But it’s still a risk that could undermine the entire ecosystem and must be taken seriously. Some cryptocurrencies, like IOTA, already use quantum-resistant cryptography techniques like Winternitz one-time signatures. Others, like Ethereum, to switch to different signature schemes for their 2.0 upgrades.

Governments and private companies are pouring billions into quantum computing research and development. Given the potential, it seems likely that the technology will eventually advance to breaking ECDSA. But hopefully by the time quantum decryption becomes feasible, most cryptocurrencies will have already implemented upgrades to quantum secure cryptography. Staying ahead of the quantum curve will be an ongoing challenge.

Extreme Volatility and Price Swings

Cryptocurrency is notoriously volatile, with massive price swings that can happen daily or even hourly. This extreme volatility makes crypto a very high-risk investment.

Some of the volatility is due to the relatively small size of the crypto market compared to other asset classes. For example, the total market cap of all cryptocurrencies is still a fraction of the stock market or bond market. With a smaller market size, prices are more susceptible to sudden spikes and crashes as money rapidly moves in and out.

Media hype cycles and sentiment also have an outsized impact on crypto prices. Investor enthusiasm can quickly turn to fear, sparking huge sell-offs. FOMO (fear of missing out) drives fast run-ups and price bubbles that eventually burst. Compared to more mature markets, valuing cryptocurrencies is much harder to do with any reliability. Most cryptos don’t have underlying fundamentals or cash flows to derive a fair market value. Prices largely reflect speculation about future potential rather than present realities. This makes it ripe for irrational exuberance.

For investors, the volatility of crypto means it should only be a small part of a diversified portfolio. Trying to trade the ups and downs is extremely risky. A long-term perspective is essential, but investors must be prepared for the possibility of steep losses.

If you have come reading till end, allow me to give you a bonus tip to secure your accounts.

Never Share Or Make Your Email Public That You Used To Signup On Crypto Exchange Or Any Means! Don’t Give Enable Browser Extensions With That Email.

Marcus Chun
Exit mobile version