5 of the Biggest Blockchain Breaches in the Last Decade, and How to Steer Clear of Them
With all the attention Bitcoin has received over the last decade, it’s no wonder that online scammers have attempted to cash in on the trend. Oddly enough, the advent of so many people trying to scam one another lends a certain legitimacy to what was at first just a clever idea.
You see, blockchain technology was envisioned as a way to bypass trust, that is, the trust investors were once forced to put into centralized authorities like banks and governments. And Nakamoto’s Bitcoin delivered this to the extent that it could as a fledgling technology. However, sometimes, code slips through the cracks, and someone, somewhere, eventually locates the inconsistency. This is where they intervene.
Hackers have often hacked solely due to malicious intent, but there have also been ethical hackers who have hacked into blockchains only to point out the inconsistent code. These are often earnest attempts to improve blockchain technology. Regardless, the scams entwined with blockchain are getting more cultivated.
Although scammers are becoming more and more sophisticated as time goes on, there are still some rules to follow if you’re looking to avoid becoming a victim. If your goal is financial gain—and not just making an example of yourself—you should be careful when you invest in cryptocurrencies yourself.
First and foremost, you should do your research. This way, you’ll know exactly how they work and can take advantage of their potential. To help you avoid such scams in the future, we’ve put together a list of some of the biggest scams carried out using blockchain platforms over the last decade, so you can watch your wallet while you play the cryptocurrency markets.
1. MountGox Exchange
In the early days of Bitcoin, Mt. Gox was one of the most popular exchanges for trading cryptocurrencies. It was hacked in June 2011 resulting in 8.75 million dollars worth of bitcoins being lost and making it one of the earliest breaches in blockchain history.
To prevent these kinds of scams, it’s important to keep your cryptocurrency stored safely on a hardware wallet such as a Ledger Nano S or Trezor instead of using an exchange as a storage method. Doing this will keep your funds from being directly accessed by hackers and fraudulent actors looking to steal them off the exchange as it happened with Mt. Gox and numerous other cryptocurrency exchanges throughout history.
When investing in any cryptocurrency, make sure you are aware of the security risks associated with storing your funds for long periods and take the appropriate steps to minimize those risks whenever possible
2. BitConnect’s Ponzi Scheme
BitConnect promised investors huge payouts and a return on investment of up to 120%. This sounds too good to be true, and it was. The company was accused of running a Ponzi scheme, which promised investors massive returns, but only paid out to early investors by using funds from new investors. One investor even filed a class-action lawsuit against the company for fraudulently earning $770 million in profit.
A Ponzi scheme is an unsustainable business model where early adopters are rewarded handsomely at the expense of everyone else involved. In this case that meant BitConnect investing customer deposits into their exchange, not into any legitimate endeavor. The exchange would then artificially inflate its trading volume by creating fake accounts and buying BitConnect Coin (BCC) with Bitcoins (BTC) and credit cards before selling them back again in minutes.
As the platform grew over time, more users added their BCC into the pot and earned interest on it – effectively making everyone involved feel like they were getting rich quickly without having to put in any hard work or smart investing.
But this all came crashing down when they stopped paying out customers with new investments coming in, leading to allegations of scamming innocent people out of millions of dollars worth of cryptocurrency. It’s these kinds of schemes that ultimately cause cryptocurrency prices to fluctuate as people lose their trust in the value of cryptocurrencies.
3. OneCoin
Another cryptocurrency scam that has gained a lot of attention over the years is OneCoin. OneCoin is an MLM (multi-level-marketing) company that was created in 2014. It has been investigated by authorities in several countries and found to be a Ponzi scheme.
The most important thing you need to know about OneCoin, though, is that it’s not a cryptocurrency at all. It’s just an MLM system with a bunch of tokens being passed around for no use whatsoever. The tokens have no real value beyond their initial worth when they are purchased from the company, and there are no real benefits to be had from owning or using them.
So how do you avoid scams like this? First, remember that cryptocurrencies are only as valuable as their users consider them to be—and if they don’t have any actual users, then they aren’t worth anything at all! The same goes for Ponzi schemes and pyramid schemes; if there isn’t any actual product behind them besides empty promises made by the people running those companies, then you should probably avoid investing your hard-earned money into those companies!
4. NiceHash
Nicehash is a cloud-based cryptocurrency exchange that allows users to rent out their computer’s processing power to miners. The service has earned its reputation as being a good option for individuals who wanted to make extra cash with their computers or video graphics cards, and also provided opportunities for others to mine cryptocurrencies without having to do all the work themselves.
The hack took place on December 6, 2017, when a large cache of bitcoins was transferred from Nicehash’s digital wallets to an unknown account. Nicehash has remained tight-lipped about who is responsible for the hack and what their exact modus operandi was. However, several security researchers have pointed toward a possible vulnerability in Nicehash’s payment mechanism as a likely culprit.
CoinDesk reported that some security experts had theorized that the attackers compromised user accounts by taking advantage of an issue with how a computer’s random number generator works when mining cryptocurrency. That random number generator (or RNG) creates the cryptographic keys for mining, and if there is a flaw in it, those keys could be generated twice and lead to account compromise.
If this is true, then it would appear that Nicehash itself wasn’t hacked; instead, its users’ payment information was leaked through individual computers used by miners. Whoever obtained those credentials may then have been able to sell them on the dark web like any other stolen account data.
5. Bitfinex Hack
Bitfinex is a Hong Kong-based cryptocurrency exchange that was founded in 2012. Bitfinex has been hacked twice, once in 2015 when 1,500 bitcoins were stolen and then again in 2016 when 119,756 bitcoins were stolen. This was the largest hack ever to occur at the time.
Bitfinex compensated its users who lost money by socializing their losses across all of their customers, which means they did not file for bankruptcy or reimburse their users—they simply took 36% off everyone’s account balance. This was particularly detrimental for those who had not lost any of their funds during the hack because they still lost a large portion of their money even though it wasn’t theirs, to begin with!
Conclusion
With the rise and acceptance of cryptocurrency, the chances for fraud are increasing. Be sure to always safeguard your investment in bitcoin and altcoins by doing your research on investments, verifying all information from multiple sources, and diversifying your holdings across different platforms and wallets.
To be clear, we are not lawyers, but we’ve been observing the industry for years now and have seen our fair share of shady crypto startups. The most common scams aren’t necessarily obvious to people who aren’t inside the crypto scene. Luckily, there are some basic tactics that everyone can follow to protect themselves against bad actors.
Do your research You should always do tons of research on any company you’re thinking of using. This is especially important if you’re considering using a coin or token as an investment vehicle.
Always check out the team behind it and make sure they’re serious about their project—always ask for some sort of proof that they exist and are part of the project (a video demonstrating what the product does would go a long way).
Don’t forget how you’ll use the coin or token once you get it, too—do some research on what businesses accept them if any, and understand how exchanges work so that you know where to trade your coins once you obtain them.
If you’ve been involved with cryptocurrency for even a short time, you’ve likely come across mentions of cryptocurrency scams. These are online cons that can show up as job postings.
They are touted as a way to get quick cash and then disappear. The truth is that any investment that offers returns of thousands of percent per year is going to attract scammers like flies on honey, but the best way to weed them out is by researching the company seriously before investing. Thankfully, blockchain technology has helped this process tremendously and makes it much easier than it used to be.
The cryptocurrency scam industry continues to skyrocket because there are so many people who want in on the action, but don’t want to put in their hard-earned cash. For example, someone may want a piece of the 3% daily returns just as much as you do, but they’ll never invest their own money if they don’t understand how cryptocurrencies work or if an investment opportunity sounds too good to be true, it probably is.
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