The Big Indian Crypto Heist - Safeguard Your Cryptos Now - Profit Hunter by Equitymaster
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The Big Indian Crypto Heist - Safeguard Your Cryptos Now

Apr 19, 2018

Editor's Note: An Indian crypto exchange recently announced that its bitcoins were stolen. The heist was worth over Rs 200 million! That's no small amount by any means. How did this happen? And what about user's funds? As usual, I defer to Prasheel's expertise when it comes to this new asset class. Read on for his insight -

Rahul Shah (Research Analyst)
Editor, Profit Hunter

Prasheel Vartak, Editor, Crypto Confidential

Just last week, one of India's biggest cryptocurrency exchanges - Coinsecure - informed users that its bitcoin funds were exposed and stolen from the exchange.

The exchange said it lost just over 438 bitcoins, valued at around Rs 200 million, in what could be the biggest cryptocurrency theft in the country.

Immediately after the discovery, Coinsecure stopped all deposits and withdrawals from its platform until further notice.

Coinsecure, which has over 200,000 users, insists its own systems haven't been compromised or hacked. Instead, the exchange points to the unconvincing claims of its Chief Security Officer (CSO), Amitabh Saxena, who was tasked with extracting a separate cryptocurrency - Bitcoin Gold, and in the process, exposed the exchange's private keys (password to the wallet that holds cryptos).

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Coinsecure had kept its private keys in cold storage (offline) for over four years, and had previously extracted without exposing the keys. This is the first time what the private keys were exposed online, without any apparent reason for doing so.

Giving access to private keys is like handing away keys to your safe to thieves.

This is exactly what happened, and Coinsecure's 438 bitcoins were swiftly transferred to a single wallet address: 1BaEJquitskdXcTj53Uy6PuUtJ5a8ETWpA.

Where Did the Bitcoins Go?

It is hard to believe the CSO, responsible for the security of the cryptos, made such an elementary error. Which is why, all fingers are pointing towards an internal job.

Coinsecure - not so secure after all - maintains that its CSO, Amitabh Saxena, may have had a role to play in the heist. In the complaint with the local police it asked authorities to bar Saxena from leaving the country until the investigation is completed.

Finder's Reward for the Community

The exchange is not giving up just yet though. It has reached out to the crypto community and announced a 10% bounty, amounting to a cool Rs 20 million, for helping find the hackers or any help in recovering the stolen bitcoins.

But this is easier said than done.

While bitcoin is designed for trustless, pseudonymous transactions and is often touted as a way to move money anonymously, this is difficult to achieve in practice.

All transactions are publicly recorded in the bitcoin blockchain, meaning the movement of cryptos can be traced from the initial purchase to other payment addresses. In addition, your bitcoin wallet software may be associated with your computer's IP address.

In this case, bitcoins were transferred out of the exchange to a single address, but then were routed to over 978 other addresses, through equal number of transactions from the original address. While tedious, it is possible to trace these coins if there were regular transactions.

However, the Coinsecure hackers used a bitcoin tumbler (also called mixer) - Bitcoin Fog - to further muddle their trail.

A tumbler is a third-party service which will swap a user's crypto for someone else's of equivalent value, and take a small commission (1-3%).

The user can then withdraw these new bitcoins from the tumbler service to a new wallet. This makes it extremely difficult to link your bitcoins to your identity by examining transactions along the blockchain.

Refund Plan

Considering the difficulty in recovery, in a recent update, Coinsecure said that...

Should we be able to recover all of our BTC, all our customers' BTC holdings will be refunded as per the balance they held with Coinsecure.

However, it warned that...

If recovery of siphoned BTC is not possible, then we will apply the lock in rates as of the 9th of April, 2018. 10% of the coin holding balance will be refunded in BTC and 90% will be returned in INR.

While it shows positive intent from Coinsecure to return the user's funds, note that bitcoin's price has rallied significantly since 9 April. Users could stand to lose over 18% gains (at current prices) due to no fault of their own.

All of this sounds unfair and full of hassle.

But it could have been easily avoided.

Readers of my newsletter, Crypto Confidential, would know the one thing I keep stressing about - Never leave your crypto at the exchange!

Exchanges can get hacked, regulated, or just disappear with your cryptos. In the crypto world, it helps to take ownership of your own funds.

If you are new to cryptos and want a helping hand in how to venture out in this new world, I along with my mentor - international crypto guru Tama Churchouse - have come out with a comprehensive, India centric learning course on cryptos and blockchain technology applications. Click here to gain access.

Warm regards,

Prasheel Vartak
Prasheel Vartak, CBP (Certified Bitcoin Professional)
Editor, Crypto Confidential

PS: The crypto world is confusing but it's here to stay. An easy way to stay on top of it is Prasheel's online crypo course that walks you through everything you need to know about cryptos - in a simple, logical fashion. Get the course here.

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