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Cyber attack on Bitcoin exchange exposes flaws in virtual currency

Fresh flaws in the virtual currency Bitcoin were exposed yesterday after cyber attacks on the main exchange where the digitally created currency trades.

Bitcoins are a 'virtual' currency not linked to any state or central bank that have been in existence since 2009. However, interest in the Bitcoin project, and the price paid for each Bitcoin surged in recent weeks.

That followed the banking crisis in Cyprus which provoked fears in some quarters that holders of traditional currencies like the euro could lose out as a result of devaluations or a currency break-up.

Yesterday, trading on the MTGox exchange, which handles most of Bitcoin trading, slowed to a near crawl as the site fought off what is believed to have been an attack from unidentified hackers.

Another website called Instawallet – which is used by people to store Bitcoins – went offline after a similar attack.

In a statement on Twitter, MTGox confirmed it was fighting a distributed denial of service (DDOS) attack.

Hackers

That is a common tactic used by internet hackers who force a website to crash by making it deal with a huge amount of queries at the same time. The sheer volume of queries is too much for the victim site's servers to handle, crashing the website.

Despite DDOS attacks being one of the most common methods of cyber attack, they are difficult to defend against.

MTGox said its security systems had failed to block the attack.

Following the problems, the controversial currency, plunged 20pc in value to a level of $112 each before surging back up to $140 a unit barely 12 hours later.

The price the online money is traded has surged from as little as $10 before Christmas to hit nearly $150 earlier this week.

Advocates characterise Bitcoin as a hi-tech version of gold or silver – a so-called 'store of value'.

In practice however, the lack of regulation is also the currency's Achilles heel, leaving it exposed to speculation and manipulation.

Yesterday's attack has also highlighted problems in the security of the currency's exchange mechanism, while critics claim Bitcoin can be used by criminals to launder money, as trading in the currency is essentially untraceable.

Regardless of the merits of the currency itself, many analysts see the sharp rise in prices it trades for as a sign of an investment bubble. By late evening each Bitcoin was trading at $134.

Irish Independent