It’s not just Bitcoin’s volatile price that can keep cryptocurrency investors awake at night.
Hundreds of millions of dollars worth of digital currency have been stolen by hackers in the past few months. Experts say the problem is unlikely to go away anytime soon, and safety fears have dragged prices down this year.
In the most recent incident, South Korean exchange Coinrail announced on Monday that it had been targeted by cyber thieves who stole around 30% of their virtual currencies.
“I expect hackers to continue targeting crypto exchanges,” said Henri Arslanian, head of financial technology in Asia at consulting firm PwC. “The rewards are high, and some of these exchanges have grown so fast,” that they have not yet implemented adequate security, he added.
In January, the Japanese exchange Coincheck said hackers stole more than $ 500 million worth of cryptocurrencies. Last year, two Bitcoin exchanges went bankrupt after falling victim to similar violations.
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That’s just the tip of the iceberg, according to Yo Kwon, CEO of Hosho Group, a Nevada-based company that specializes in securing applications that use blockchain, the technology behind Bitcoin and other cryptocurrencies.
Kwon estimates that around a third of all cryptocurrency exchanges have been hacked at some point. And he predicts that “many more” will suffer the same fate.
Regulators “Confused and Concerned”
The spectacular rise in the price of Bitcoin and other cryptocurrencies over the past year has caught them widespread attention. Many of them struggled in 2018: Bitcoin fell more than 50%.
“Investors are increasingly concerned about cybersecurity issues,” said Adrian Lai, founding partner of Hong Kong-based cryptocurrency investment firm Orichal Partners. “At this point the standard is of course not high enough.”
Authorities around the world have taken different approaches to regulate virtual currencies. Some industry insiders say this complicates efforts to make the exchange more secure.
At one end, China has tried to ban Bitcoin trading. Japan officially recognized Bitcoin as legal tender last year and started license swaps – but things got tougher after the Coincheck hack. In the United States, the US Securities and Exchange Commission has strengthened digital assets.
“Confused and concerned regulators are regularly reaching out,” said Eiland Glover, CEO of Tennessee-based blockchain company Kowala. This is “not conducive to high security or the broader introduction of cryptocurrencies,” he added.
Smaller investors at greater risk
PwC’s Arslanian said the people who have the most to lose in hacking incidents are mom-and-pop investors who are more likely to put all of their cryptocurrency savings on one platform for convenience.
This makes them much more prone to losing their investments in the event of a robbery like with Coinrail and Coincheck. (Coincheck said in March it had made up its customers for their losses from its own resources.)
Big investors – like banks and insurance funds – are likely to be less concerned about these types of hacks, added Arslanian. This is because they can spread their risk across different platforms as well as invest indirectly through derivatives and other avenues that are generally less accessible to ordinary investors.
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Some experts say the vulnerability to hacks is due to the early stages of virtual currencies compared to more established assets like stocks and bonds.
“Markets will likely adjust over time,” said Hosho Group’s Kwon.
He says the cryptocurrency industry needs to adapt and become more secure as more and more large investors move in.
“Exchanges that understand the growing importance of security – not just because of its longevity but also as a competitive advantage – will do better,” said Kwon.
CNNMoney (Hong Kong) Initial publication June 13, 2018: 6:00 a.m. ET