How Online Gamblers Can Keep their Bitcoins Safe and Sound
Mar 31, 2014
Despite recent cyberattacks and bankruptcies, there are places for online gamblers to keep their Bitcoins safe and ready for use.
When it came to Bitcoin, everything seemed to be by-the-numbers. The virtual currency was invented in 2009 and more units have come into circulation as more computer engineers are mining them. Just as with gold during the Late Middle Ages, with more coming into circulation people holding large amounts are looking for places to store them. This has led to the creation of exchanges, which are banks using digital security systems to store large amounts of Bitcoins. The largest exchange, MtGox, held 850,000 coins worth roughly half a billion dollars. Customers can open a wallet on an exchange, which is essentially a bank account.
Given the importance Bitcoin now has in the online and mobile casino gambling industry (being now accepted by internet casinos like Bodog, Zynga and Bet365) as well as its volatility, it’s important for online gamblers to know how to keep their coins safe.
Cracks begin to appear in the system
The key word here is held. On February 25th MtGox suspended trading and three days later declared bankruptcy, announcing that the company had lost 850,000 coins. How does an exchange lose Bitcoins? According to CEO Mark Karpeles, the company’s security system was hacked and the coins were withdrawn. As Bitcoin is a new, unregulated currency without any system in place to ensure deposits, MtGox’s depositors saw their money literally disappear. Imagine a bank robbery in the old days before government-backed insurance protected depositors from losing their money. At the February 25th exchange rate, all in all $474 million disappeared from MtGox’s storage facilities.
This was the biggest but not the only exchange to go under. Another major bank, Flexcoin, declared bankruptcy shortly after and under similar circumstances. Flexcoin lost 896 coins worth $589,000. Smaller exchanges Vircurex and Poloniex have fallen victim to cyber attacks as well, although Poloniex has maintained enough of its reserves to stay open and has pledged to return the lost coins to its depositors.
All of this has led investors to have serious doubts as to whether the exchanges have the ability to keep their deposits safe from cyber attacks. According to Alex Daley of Casey Research said that “opening a bitcoin account on an online exchange is like opening a brokerage account in Zimbabwe… MtGox is not the first site to suffer problems and certainly won’t be the last.”
Cold and hot wallets
A crucial component of Bitcoin storage is whether it is held in cold or hot wallets. Both methods of storage are digital, although a cold wallet keeps the Bitcoins in an offline computer system, which is therefore free from potential cyber attacks. This is one way to keep coins safe. It isn’t foolproof, but to date all of the major hacks have been against hot storage wallets. We think that cold storage is on the whole safe. The problem is that is not very convenient for people for make regular online transactions using Bitcoins. This generally means online shoppers and gamblers. If you play online blackjack regularly and use Bitcoins to make wagers, you want quick access to your money.
This is where hot storage comes in. This method is more convenient because coins can be immediately withdrawn and spend anywhere which accepts Bitcoins. The downside? The coins are held in online (hence the “hot”) accounts and are therefore vulnerable to cyberattacks.
So what to do?
If you decide to keep your Bitcoins virtually, do your homework on where to put them. Shopping for a virtual wallet is like shopping for a bank, some are more secure t. MtGox, Flexcoin and Vicurex have gone under, but there are other exchanges still running smoothly. Coinbase is one such exchange which offers both cold and hot storage. One exchange, Elliptic, specializes exclusively in cold storage, and has seen an uptick in deposits following the bankruptcy of MtGox.
There is also the Blockchain virtual wallet, which is the only wallet available on the iOS platform. This app is perfect for users of iPhone mobile gambling apps, who can manage their coins as well as place wagers directly from their devices. Blockchain was recently dropped from the Apple store but is still available for download.
Some Bitcoin investors and even some of the currency’s most staunch proponents are now keeping their reserves in physical safes. You’re probably asking: how is it possible to keep a virtual currency in a physical safe? Each coin has a digital key which allows the virtual money to be spent; this key can be printed and stored elsewhere. Flip Filipowski of SilkRoad Equity recommends doing just this: “printing off the private key from your bitcoin, putting it into a paper form and sticking it in your hip pocket or house wall safe is one way to make sure it’s safe.” Keeping the digital key safe is more important than the coin itself, because the key is what is used to initiate a transaction. When coins are stolen in cyberattacks hackers are really looking for the digital keys, not the coins themselves.
Tags: Alex Daley, Bet365, Blockchain, Bodog, Casey Research, Elliptic, Flexcoin, Flip Filipowski, iPhone mobile gambling, Mark Karpeles, mobile casinos gambling, MtGox, Online blackjack, Poloniex, SilkRoad Equity, Vircurex, Zynga