Our attention to the current bitcoin feeding frenzy has been focused on how closely it resembles previous boom and bust cycles. (Could You Be a Bitcoin Billionaire, What Should Bitcoin Be Worth?) But there is another concern as more and more investors pile into cryptocurrencies. Hackers create fake bitcoin wallets to steal your money. How does this work?
A Virtual Currency
If you have money deposited in a bank in the USA your money is backed by the full faith and trust of the US government. Your deposits are insured by the FDIC (Federal Deposit Insurance Corporation) up to $250,000. And, instead of depositing your money in the bank you can receive paper currency and coins and hold your money in your hand. In the case of a virtual currency like bitcoin and others neither of these is the case. If someone hacks the computers of your bank you can still get your money back via the FDIC. If hackers hit your virtual currency you are toast.
Hacking of Cryptocurrencies
Every year there are several hacks of cryptocurrency operations ranging from a few million to hundreds of million worth of value. For this to happen, the cryptocurrency company has to have neglected its security and a hacker has to have had the skillset to get into their system and transfer currency out of wallets into another wallet under their name. But there is a simpler way for hackers to steal your bitcoins. They can set up a fake wallet. How does that work?
Folders, Wallets and Virtual Compartments
When you save a document on your computer you put it in a folder. There is no physical folder but rather computer code that designates where the computer can find and retrieve your document. And, of course, there is no document but rather computer bits and bits that when retrieved look like a real document on your computer screen. In a similar fashion there is no real bitcoin or other cryptocurrency wallet but rather computer code that allows the system to keep track of how much cryptocurrency value is yours.
Fake Bitcoin Wallets
CNN Tech has a good article about how hackers take advantage of Bitcoin.
“Whenever something gets this much publicity and popularity and there’s a potential to make what appears to be free and easy money, the criminal aspects of the world are going to take advantage of it,” said Mike Murray, vice president of security intelligence at mobile security firm Lookout.
In order to use bitcoin, you need a digital wallet to receive, send, and store cryptocurrencies. By creating fake wallets, hackers can take advantage of people new to bitcoin and other digital currencies who might not realize the difference between legitimate companies and fake apps.
Unsuspecting people hear about the bitcoin feeding frenzy and decide to get in. They find an app on Google Play or somewhere else, download it, and send money. Unfortunately, these apps are set up by hackers who have nothing to do with cryptocurrencies and are simply stealing your money. To the fact that bitcoin is due for a crash please add the fact that hackers create fake bitcoin wallets to your list of concerns when investing in cryptocurrencies.