Hacking of the Bitcoin Ledger by Breaking the Encryption

Many people still talk about Bitcoin getting hacked. This is a major misunderstanding. The distributed architecture and the cryptographic hashing system make the Bitcoin ledger extraordinarily secure. Indeed, the system’s resilience to hacking is one of its major selling points. The Bitcoin ledger itself appears never to have been hacked. The hacks and consumer losses that people talk about are actually due to mishandling of private keys. The private key (password) is what provides secure access to your bitcoins. Fundamentally, bitcoins are bearer assets, so if you lose the key, you lose the asset.

Fortunately, you can handle Bitcoin securely if you know what you’re doing. Moreover, there are numerous companies and organizations currently developing better systems for management of private keys. This means that in the future people will have access to a menu of options for securing their bitcoins that range from self-managed deep cold storage to hybrid solutions involving trusted third parties.

Related to the perceived risk of a hack of the blockchain is the risk of a “back door” weakness purposefully written into the software. This is extraordinarily unlikely because Bitcoin has already existed for a decade as open-source software “in the wild.” Anyone in the world who has Internet access can audit the code, and probably tens of thousands of people have done so. This intense level of scrutiny makes hiding malicious code nearly impossible, especially since the Bitcoin software is so simple compared to many modern software programs. Bitcoin’s software started with just a few thousand lines of codes, and the most common Bitcoin Core implementation is still only around a hundred thousand lines.¹⁵⁰ For comparison, Microsoft Windows has tens of millions of lines.¹⁵¹

Prior to launching the network, Bitcoin’s creator(s) would have known that mining and maintaining the operation of the network in its infancy would likely fall primarily to him/her/them, which would result in the accumulation of a significant number of bitcoins. It is believed that the founder(s) of Bitcoin owns a significant number of bitcoins, worth billions of dollars at current prices as a result of mining in the early years when the rate of issuance of new bitcoins was higher. It seems very unlikely that Bitcoin’s creator would risk destroying a multi-billion-dollar fortune by destroying confidence in Bitcoin. He/she/they would have realized that creating a durable and secure network would be far more profitable than creating one with a security hole and attempting to “exit scam” the system—even if the founder(s) thought he/she/they could sneak it past the thousands of programmers crawling all over the open-source code. This logic assumes that the founder(s) is/are even still alive today. There is a contingent within the Bitcoin community that believes the founder(s) died years ago, and it is possible that the founder(s)’ bitcoins are lost forever along with the private keys that control them.

The cryptographic tools used in Bitcoin (primarily SHA-256 and ECDSA described in Chapter 7) have been used and field-tested for decades. They are therefore believed to be secure. However, they have not been mathematically proven to be unsolvable (other than by brute force computation). It’s therefore theoretically possible that they could be broken by new mathematical solutions or computational techniques not yet invented.

Quantum computers, which have recently made it off the drawing board and into the laboratory in recent years, could eventually become capable of breaking Bitcoin’s encryption, especially ECDSA. But thus far the history of cryptography has demonstrated that the encoders have been able to stay ahead of the codebreakers by developing better encryption techniques. It seems likely this will continue to be true since “quantum-resistant” encryption techniques are currently under development to meet the challenge of the quantum computers. However, if the Bitcoin network were to implement a stronger form of encryption in response to a new technique (quantum computing or otherwise) for breaking Bitcoin’s security, such an implementation might require the network to “hard fork” to a new version. This would require the network node operators to upgrade to the new version, and such an event could be disruptive.