It wasn’t even a month ago when IT Business released a news article titled Two more Bitcoin exchanges get hacked… and all of a sudden it has happened again. Well, a little bit differently this time.
This time around, there was an internal heist and a questionable closure. The latter of the two looking along the lines of MtGox, but that’s something that will be covered later.
BlackCoin Exchange Heist
CrytoRush was a leading exchange for an alt-coin named BlackCoin. Not long ago, the company claimed to have received a half million dollar investment. The company gained the trust of virtual currency enthusiasts and day traders all around. However, they are now under major scrutiny due to the recent BlackCoin heist.
So, what happened?
A company rep claimed that the thief found an exploit in BlackCoin, allowing them to inflate user balances up to 22,000,000 additional coins. This made it possible for the users to take out more than they actually had in their account. The thief quickly took advantage of the glitch.
The heist amounted to 1.55 million BlackCoins, which equals out to 120 bitcoins or approximately $70,000 USD at the time of the heist.
The case of Vircurex was not so much of a ‘heist’ but many are still viewing it as such. It is a very complex situation. The company publicly posted their finances last year, proving that they were still trying to recover from two hacks, including a hack that occurred shortly after the 2013 bitcoin boom. Even after taking on investment money, the company has not been able to attract much attention to their exchange. This means low amounts being taken from fees.
So, how does this put its users at a loss? Their money is essentially gone because the company has been operating on a fractional reserve. The company has not kept all client funds on hand because they have never completely made good on previous bitcoin debts. This means that there are not enough coins on hand to cover the current user balances.
The only difference between Vircurex and MtGox is that it appears that Vircurex has been trying to do the right thing. In fact, they appear to be acting in good faith by keeping their exchange running with the intent of paying off current debts.
This comes from the recent surfacing of a repayment plan issued by Vircurex. In this plan, current account balances would be frozen and labeled as ‘frozen funds’. Any newly deposited funds will be fully accessible. The frozen funds will be transferred into usable funds over time as the company generates profit to pay back the owed amount.
At this time, it appears that the funds affected are BTC, LTC, TRC, and FTC and are spread across a little over 2,000 accounts. Please note that some of these accounts may have the same owners as each account is by currency, not user.
How to Stick to a Safe Virtual Currency Exchange
Judging by the amount of times Vircurex was hacked last year alone and the amount of new exchanges that are being hacked or robbed, there is no doubt that many are becoming unhappy with the virtual currency world.
In fact, it’s crazy to think about how safe many of these virtual coins are, yet how unsafe the exchanges for them are at the same time.
For anyone that is looking to trade virtual currencies, a bit of thought will have to be made on which exchange website you use. There are many different online exchanges for bitcoins and alt-currencies, but not all of them should be trusted.
Exchanges like Vault of Satoshi, which is mainly a Canadian exchange, are becoming respected because they provide transparency on held funds. This means that they will show you the funds in their reserves and you will know if there is ever a risk of insolvency.
BitStamp plans to implement the same level of transparency.
An exchange that absolutely should not be trusted is BTC-e as it does not provide any transparency and it’s as close to anonymous (both staff and users) as you will find.
Kraken is becoming well-known and it’s taking on new investment money. It should be a trusted place to exchange bitcoins as it takes a charge for mainstream competition in the upcoming months or years.
This summer we will also see the Secondmarket U.S. Bitcoin exchange open up. Given the backing of Secondmarket, there is no doubt that this will be an exchange to trust right from the flood gates opening.
It’s a hard time for virtual currency traders as the free market is starting to get exposed in every way possible. This is especially true for anyone that lost money on MtGox. Save yourself from getting robbed and stick to cold storage of coins or actively trade them at a transparent and generally trusted exchange. Due diligence is essential!