“Last night,” announced Bitfloor founder Roman Shtylman on Tuesday, “a few of our servers were compromised. As a result, the attacker gained accesses to an unencrypted backup of the wallet keys...” The effect of this compromise was the loss of 24,000 bitcoins, estimated to be worth around $250,000 in hard currency.
Bitfloor is one of the online exchanges that allows people to exchange the virtual money for coin of the realm, and was at the time of the breach the fourth-largest Bitcoin-to-US dollar exchange. Bitcoins are an attractive target for cyber thieves because they are traded online in a peer-to-peer encrypted and irreversible manner, and effectively impossible to trace. They can be used as a form of online bartering (for example, they can be used to buy online gaming gold) or converted to cash via exchanges such as Bitfloor.
In the real world central banks, such as the Bank of England for Sterling and the Federal Reserve for US, create money. Bitcoin creation is decentralized. Anyone can ‘print’ bitcoins by solving a cryptographic puzzle. However, the difficulty of the puzzle is designed to prevent a flood of new bitcoins, and thus provide a control on the money supply. Most newcomers gain their initial supply of bitcoins by ‘buying’ them through exchanges such as Bitfloor.
Bitfloor is now offline and its future is in doubt. Sophos points out that Shtylman “has just racked up a quarter-million dollar loss that will take him ten years of Bitcoinery to make up, assuming he can resume trading at the levels he had before shuttering his exchange following the breach.” That, however, may be the lesser of his problems – following the earlier breach and loss, affected traders decided to sue Bitcoinica.
Mt.Gox is the world’s largest bitcoin exchange. It too was hacked just over a year ago, and lost about $1000. It was a smaller amount, and the site survived and remains the largest exchange. Following the Mt.Gox breach, the ‘value’ of the bitcoin plummeted. This morning, however, HITB notes the perversity of all markets: “The hacker probably didn’t expect to improve the market for Bitcoins overall, but that’s exactly what happened, as the value of Bitcoins spiked about 6 percent today, from $10.40 per Bitcoin to about $11 per Bitcoin.”