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04/11/2013 08:08 am ET | Updated Apr 11, 2013

How Hackers Could Burst The Bitcoin Bubble

Willie Sutton, the famous bank robber, once supposedly said he held up banks "because that's where the money is."

Today, the money is in Bitcoin, a virtual currency with a skyrocketing value. And that value has caught the attention of today's digital bank robbers -- hackers.

Over the past week, hackers have stolen bitcoins from digital wallets and hijacked computers to create new bitcoins -- the equivalent of minting money.

But hackers have also found a way to bring financial ruin to most everyone involved in the Bitcoin craze. They have shut down sites where bitcoins are exchanged for cash, creating a panic that causes values to plummet, then buying up cheap bitcoins and profiting when the currency rebounds.

"Attackers try to exploit any system where they think they can profit and get away with it, whether that is robbing banks, stealing online banking credentials, or attacking a Bitcoin exchange," Gavin Andresen, chief scientist at the Bitcoin Foundation, a nonprofit organization that works to standardize and promote the digital currency, said in an email.

Bitcoin is a virtual currency that only exists online. It is not backed by a central bank or government, and its value is based on the confidence of its users. People buy bitcoins with cash; they use them to trade goods; and they earn more bitcoins by solving complex mathematical problems.

Some are attracted to the currency's anonymity, which allows them to buy drugs or engage in online gambling without being tracked. Others like the idea of cutting financial systems out of the equation. Either way, some Bitcoin owners have become very wealthy, creating a few so-called "Bitcoin millionaires."

But hackers could also burst the Bitcoin bubble with the click of a mouse.

Last week, hackers attacked Mt. Gox, the most popular Bitcoin exchange, taking the site offline by flooding its servers with traffic, a technique used recently to also attack traditional financial institutions. As news spread, Bitcoin values sunk from $147 to $115.

In a statement, Mt. Gox's operators said the attack may have been motivated by hackers trying to prompt "panic selling" -- buying up cheap bitcoins after creating hysteria, then waiting for the currency's value to recover.

"Repeat this two or three times like we saw over the past few days, and they profit," the site's operators said.

The recent hack was the latest in a long line of attacks targeting Bitcoin exchanges that have sent the market into tumult. In 2011, Mt.Gox temporarily suspended operations after a hacker compromised a user's account and sold his bitcoins. After the hack, the value of Bitcoin sunk from $17 to pennies "in a matter of minutes," according to Ars Technica.

Hackers have also targeted services that allow users to store their bitcoins. Last week, Instawallet suspended its service indefinitely after being hacked. In a statement, the company told users to submit claims to recover their money.

Bitcon wallets are vulnerable because they rely on private keys. If somebody steals your private keys, they can steal all your bitcoins, Andresen said. If those keys are on a computer and the computer becomes infected with malware, "you're in trouble," he said.

"Even if you encrypt your wallet with a passphrase, the malware can lie in wait and steal your wallet the first time you go to spend some bitcoins and type your passphrase," Andresen said.

And while traditional banks typically refund customers whose accounts are hacked, Bitcoin hacking victims have no recourse.

"Once a Bitcoin is stolen, it's gone. There's no way to get it back," said Richard Henderson, security strategist and threat researcher for Fortinet’s FortiGuard Labs.

Andresen said researchers are working to make Bitcoin wallets more secure. They are creating hardware wallets that can't be infected with malware and developing a system of storing keys on different devices, such as a computer and a mobile phone, he said.

Meanwhile, hackers have started using botnets, or networks of infected computers, to solve complex mathematical problems and be awarded with new bitcoins, according to researchers at Kaspersky Lab, a Russian security firm.

On Wednesday, the value of a Bitcoin rose as high as $260 before falling to about $130. As long as Bitcoin values continue to fluctuate, hackers will likely increase their attacks, Henderson said.

"It would be silly for them not to," Henderson said. "It's easy pickings."

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