Bitcoin Rally Spawns Startups Offering Theft Protection: Tech

Feb 07, 2014 12:27 pm ET

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Feb. 7 (Bloomberg) -- Bitcoins, after surging 90-fold in value last year, have become an alluring target for hackers and thieves, spawning a growing industry of startups seeking to protect virtual currency investors against losses.

Since the inception of the currency, more than 35 major Bitcoin scams and thefts have occurred worldwide, including the heist of 38,527 Bitcoins from online-exchange Bitcoinica LLC in May 2012, according to BitcoinTalk.org.

About a dozen startups, from a coin-making company called Titan Mint Inc. to a marketplace called BitShares that lets people trade Bitcoins among themselves, are aiming to assuage concerns over Bitcoin’s vulnerability. They’re offering everything from metal coins embossed with security codes to encrypted online accounts.

“The risk is there, and that is enough to dissuade some users,” said Nicholas Colas, chief market strategist for ConvergEx Group in New York. He estimates that more Bitcoins are lost to thieves and hackers today than dollars to bank robberies.

Since Bitcoins are stored as software files in “wallets,” or folders on websites, personal computers or smartphones, that makes them susceptible to loss to theft, failure or hacking. And because the digital money was designed to be difficult to trace, any looting is akin to a cash plunder, and harder to track compared with real money held in bank accounts.

The skyrocketing value of Bitcoins, to more than $1,000 in November from about $12 in early 2013, has made them a more tempting target and worth extra protection efforts. Bitcoin’s price dropped about 7 percent on exchange Bitstamp today after a major Tokyo-based exchange, Mt. Gox, said in a blog post it imposed a “temporary pause on all withdrawal requests.”

Real Cash

Out of about 1 million people with Bitcoin wallets, as many as a few thousand have lost their funds, according to Andreas Antonopoulos, a Bitcoin security analyst.

The scope of theft is difficult to measure, since Bitcoins were designed to be a hard-to-trace self-governing currency. Created in 2008 by an unknown programmer or group of programmers, the supply of Bitcoin is regulated by the software underlying the currency, which can only be created by solving complex puzzles embedded in Bitcoin’s code. The digital money is being used to buy everything from chocolates to digital cameras on the Web.

Michail Wilson, a 42-year-old systems administrator in Seattle, turned to physical coins from Titan Mint. Each coin -- which will be available in gold or silver -- contains a redemption code to unlock Bitcoins.

Mass Adoption

“I like the idea of being able to hold something,” said Wilson, who said he bought 230 Titan coins and later sold half of them to other people. “I don’t have to worry about it being hacked. I can just throw them in a safe and not worry about my wallet being hacked.”

Once Bitcoins are stolen, it may be impossible to get them back, since a transfer is similar to a cash transaction, rather than a reversible exchange between accounts. Bitcoin wallets also aren’t protected, such as through deposit insurance offered by governments. Financial tools that safeguard money -- such as escrows and safes -- are also being developed for Bitcoins. Of the nine companies funded by Adam Draper’s Boost, six have a strong focus on security, he said.

“Having people think their money is safe is the most important aspect for Bitcoin mass adoption,” Draper wrote in an e-mail.

Central Authority

Scott Robinson runs Bitcoin Accelerator Program, a startup incubator in Sunnyvale, California. He said he’s received more than 45 applications from startups. Of those, about 40 percent were focused on security or digital wallets, he said.

“In Bitcoin, there’s no central authority that’s monitoring the risk points of account access, as in banking,” said Richard Crone, CEO of payment-consultancy Crone Consulting LLC. “There’s no oversight. There’s no way of estimating what percentage of people using Bitcoin have lost money due to hacks, viruses and thefts -- which should have everyone question the viability, given these vulnerabilities.”

Some developers of new Bitcoin-security technologies have background in cryptography and military security. Alan Reiner -- CEO of Armory Technologies Inc., the maker of secured Bitcoin wallet Bitcoin Armory, which has been downloaded 65,000 times in the last six months -- used to work on missile defense at the Johns Hopkins University Applied Physics Laboratory.

Security Opportunities

Ian Purton, developer of StrongCoin.com, learned about Bitcoin while designing software for investment banks. Dan Larimer, who is building a more secure currency exchange, had worked on autonomous vehicles.

“We have security problems, but we also have security opportunities,” Antonopoulos, the security analyst, said in an interview. “We can innovate with money.”

To reduce the risk of currency-exchange website owners stealing users’ money, Larimer and his team of more than 15 full-time employees are building BitShares, a Bitcoin exchange where the participants jointly run and manage the operation.

While users usually have to trust their money and data to a private company to buy and sell Bitcoins, the members of BitShares also double as safekeepers. Since the technology will be distributed as bits of software across members’ computers, no single person will have access to all of the money or the central system.

“No company can run away with your funds, so you don’t have to worry about that,” Larimer said. “There’s no central place to rob.” His exchange is on track to debut this year, he said.

Paper Wallet

Another method to prevent theft is “cold storage,” or offline Bitcoins. Antonopoulos has created the Safe Paper Wallet project, which sells kits that let users print their log-in credentials on a piece of paper, which can then be kept in a safe-deposit box.

“I keep 99.9 percent of my Bitcoins in my paper wallet,” Antonopoulos said. “You don’t walk around with your net worth in your purse.”

Czech startup SatoshiLabs is releasing a device with a small screen and two buttons that must be used to initiate Bitcoin transactions. Money can’t be moved without the device, making it more difficult for hackers to steal Bitcoins.

Another popular security method is to store Bitcoin passwords as well as the actual digital money as digital codes etched on coins and other metal objects such as a plaque, to make sure they won’t be lost in a fire or obliterated by spilled coffee.

Physical Safeguards

Bitcoin Firesafe, a startup in Memphis, Tennessee, in November began selling fireproof metal pieces that contain Bitcoin wallet owners’ private passwords. That allows users to remove login information from a computer, so it can’t be found by a virus or a hacker.

For Titan coins, each is registered to an e-mail address and password, which are needed to redeem the Bitcoin value stored within. To spend the coins, users peel back a security hologram to uncover a unique redemption code. Tim Fillmore, president of Titan, said the company has sold more than 1,000 coins since they went on sale in September.

“They are really designed to appeal to coin collectors and traditional gold buyers,” Fillmore said.

--Editors: Reed Stevenson, Jillian Ward