Credit Suisse report: Bitcoin is immune to hacking, but this security is "relative"

Swiss multinational financial institution Credit Suisse has recently released a report that considers the security of Bitcoin and blockchain to be “relative.”

The report points out that bitcoin presents some unique risks. The bank's market research unit said the cryptocurrency's value is three times more volatile than the price of oil and 11 times more volatile than the pound-dollar exchange rate after Brexit.

Bitcoin transfers are also irreversible, so if someone makes a Bitcoin payment to the wrong account, they are out of luck. In addition, if a Bitcoin user loses their private key, they may lose all their Bitcoins.

The immutable structure of blockchain

The Bitcoin blockchain architecture has proven to be immune to the risk of hacker attacks. The blockchain is not a series of interconnected individual accounts, but a record of past transactions. When a user wants to transfer bitcoins, all computers running the Bitcoin software will process the signature of the sender of the bitcoins through an algorithm and verify past transactions recorded in the blockchain to ensure that the sender is indeed the owner of these bitcoins.

Other computers (miners) will then verify the recipient of the bitcoins. The transaction is then aggregated with other transactions, and the computer running the Bitcoin software (miner) can verify these transactions by solving a mathematical problem. Other miners can then verify the accuracy of the miner's transaction verification. When they agree that the transactions are valid, the miner will be awarded new bitcoins, thereby increasing the supply of Bitcoin.

Challenges for hackers?

In theory, a hacker could hack into the Bitcoin blockchain and change records to look like previous Bitcoin transactions, thereby transferring Bitcoin to the hacker's account. But this would require a huge amount of computing power. Bitcoin users verify a transaction by looking at all past transactions, so the hacker would need to solve a mathematical puzzle connected to a particular block and all the blocks after it to complete the manipulation.

A block is considered valid only when it has been confirmed by six other blocks. The deeper a block is in the blockchain, the more computing power a hacker would need to change the contents of the block.

51% Attack

Excessive concentration of Bitcoin miners’ computing power also poses a potential risk. If one party controls 51% of the Bitcoin network, then in theory they can prevent the settlement of legitimate new transactions or undo the confirmation of recent transactions, which could lead to double spending of Bitcoin.

According to calculations conducted by Credit Suisse, by controlling 30% of the network's computing power, bad actors have a 40% chance of mining six consecutive blocks in a week, which is enough to allow them to change transactions. However, in the event of a so-called 51% attack, the value of Bitcoin will shrink significantly. In other words, miners who attack the network will not only steal Bitcoins, but also destroy the overall value of this asset, including those they already own.

In order to gain 30% of the network’s hashrate, bad actors need to mine past blocks, so they also have a stake in the integrity of this ledger.

Cryptocurrency cyber theft

Most Bitcoin users use online exchanges to exchange fiat currency for Bitcoin, and digital wallets to facilitate payments. But both exchanges and wallets have been attacked. In August 2016, Bitfinex exchange was hacked and 119,756 BTC were stolen.

Mt.Gox, which collapsed in 2014, was allegedly hacked and 850,000 BTC was stolen, with only 24% of the bitcoins recovered. Japanese prosecutors charged former Mt.Gox CEO Mark Karpeles with embezzlement. Suddenly, various articles accused the exchange of problems with unorthodox management.

In short, Credit Suisse believes that Bitcoin and blockchain are indeed safe, but this security is not absolute but relative.