Mailbag: Crypto Hacks, Using Bitcoin to Buy Coffee

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Q: It seems like more and more people are trying to – and succeeding – hack crypto or crypto exchanges. Does that mean crypto is more vulnerable to exploitation than we previously thought? Or is something else at play here?

A: It’s a combination of a few things. But yes, crypto is more vulnerable to hacking than was originally thought when it debuted some 10 years ago.

Some of this is the fault of centralized exchanges not taking security seriously enough. Some is due to the bear market. With coins losing 70% to 80% of their value in recent months, it’s no longer outrageously expensive to launch 51% attacks – which gives miners control of a majority of the network’s mining power and the ability to defraud other users. Smaller coins are particularly vulnerable to this attack. Since the middle of 2018, verge, MonaCoin, bitcoin gold and vertcoin have all endured 51% attacks.

Ethereum classic was also targeted in the first 51% attack against a top-20 coin. It lost more than $1 million.

Buggy smart contracts on blockchains are another vulnerability. Easy “patches” that the software world uses don’t work in the blockchain ecosystem because blockchain transactions cannot be revised or altered. So additional smart contracts must be created to interact with them and fix the vulnerability.

Even the biggest coins have trouble catching all the bugs. Ethereum barely avoided letting a bug drain millions from its accounts. A white-hat company warned ethereum’s lead developers of a bug the day before a major upgrade was planned. Luckily, the upgrade was postponed and the bug was fixed.

Hackers have stolen nearly $2 billion worth of cryptocurrency since the beginning of 2017, mostly from exchanges. Coinbase spotted a 51% attacker siphoning off $1.1 million but caught it in time to prevent any currency from being stolen from its accounts.

To put $2 billion in context, that’s about 1.5% of the capitalization of cryptocurrency’s top 100 coins. That’s not a horrific number. Americans spend $187.5 billion each year on average just on their mutual fund fees. It just seems like a lot because at one time we thought cryptocurrencies were unhackable.

Things could get worse before they get better, according to a recent MIT study. Tens of thousands of contracts may contain some other kind of vulnerability. And there’s no magic bullet here. Exchanges and cryptocurrency companies have to be ridiculously diligent in constantly searching for bugs and vulnerabilities.

Cryptocurrencies have a lot of positives. Unfortunately, being immune to hacks isn’t one of them.

+ Early Investing Co-Founder Andy Gordon

Q: Tim Draper says everyone will buy coffee with bitcoin in 2021. Do you agree with him?

A: No, I don’t agree with Mr. Draper here. I see bitcoin as an emerging rival to fiat currencies. In this way, it’s similar to gold. Both are scarce and durable assets.

When I buy gold or bitcoin, I’m doing so because I don’t trust government or central banks. I have watched them operate, and I know how incredibly reckless and self-serving they are. I’m buying these alternative assets because I think fiat money is in huge trouble over the long run. I’m buying because the debt bubble we’re in will eventually implode.

So no, I don’t think that in two years we’ll all be spending bitcoin on coffee. I think that in two years, people will still be stockpiling gold and bitcoin as fiat currencies attempt to inflate away their problems.

After all, if my goal is to become less reliant on fiat money, why would I spend bitcoin (digital gold) on coffee? I wouldn’t, just as I wouldn’t sell any real gold. Assuming most people will still be receiving their pay in fiat in two years (a safe bet), I think they’ll use that paper money to buy everyday goods. And they’ll keep hoarding sound money and storing it for the future.

I don’t believe bitcoin needs to be used for everyday purchases to succeed, at least not for a decade or so. Until then, it just needs to offer an alternative to fiat money as a way to store value. As people continue to lose faith in central bank money, more will move a portion of their savings into such alternatives.

Make no mistake – for now, bitcoin is a speculative store of value. But many of us think the risk-reward here is unmatched by any other asset. Possibly 1% of the world owns any crypto today, yet much of the world waits on the sidelines, interested but undecided. The bet is that coming monetary and financial crises, made inevitable by the ongoing debt bubbles, will continually push those fence-sitters toward the “holder” camp.

+ Early Investing Co-Founder Adam Sharp

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