Biggest Heists in Bitcoin History and How They Were Pulled Off

Bitcoin’s history is rife with hacks and heists, sometimes resulting in six-figure bitcoin losses and businesses going bankrupt, unable to pay their customers back. A new video by Bitcoin.com explores the largest bitcoin heists in history and explains how each one was pulled off.

Also read: How to Earn Bitcoin Cash Income

Lucrative Crime

With cryptocurrencies’ steep rise in value, heists have…

Window opens for liquidators to make $23 million bitcoin claim

28 January 2015 | Hamish Fletcher | nzherald.co.nz

The liquidators of a New Zealand bitcoin trading platform will soon be able to make a claim for $23 million worth of the digital currency that was being held with a now-bankrupt Japanese exchange.

New Zealand limited partnership Bitcoinica owned and managed a digital currency trading platform but shut down in 2012 after bitcoin and fiat currency were stolen from it.

After being appointed, liquidators Anthony McCullagh and Stephen Lawrence from PKF believed the partnership had 64,532 bitcoin and US$135,000 in the now defunct Mt Gox. Following lengthy wrangling, the liquidators had just obtained access to two of the accounts holding these bitcoin the month before Japan-based Mt Gox stopped trading last February.

Dear Investors I confirm that Steve Lawrence & I, of PKF Corporate Recovery & Insolvency (Auckland) Limited have been appointed liquidators of the Bitcoinica Limited Partnership, which is registered in New Zealand. We are currently collecting information  and records and our immediate priority is securing the investor funds (in both cash and Bitcoins) and determining investor balances. It is too early to know how long the liquidation process will take, but we would like to move as quickly as possible towards a distribution to investors/creditors. With this in mind, we would be grateful if all investors and creditors could email us with: 1. Their address and contact details; 2. Details of any amounts owed (both in bitcoins and/or currency); and 3. Supporting documentation for the claim;  Please send your details to [email protected] The Liquidators’ first report is due to be sent to all creditors by 26 November 2012, but we are unable to do so if we do not have contact details for creditors or investors.  Our report will provide you with further details on the liquidation process.  We would also appreciate feedback from investors on whether they would prefer to receive a distribution in the form of Bitcoins (where possible) or whether they would prefer a straightforward cash distribution. We are still seeking to determine what options are available to us at law, and will let investors know in due course. Lastly, we are aware of legal proceedings underway in California against the Limited Partnership. The Liquidators have sought to have the Limited Partnership withdrawn from the proceedings on the basis that it is in liquidation. We are concerned that the plaintiff investors may be seeking to better their position ahead of other investors, and we wish to see everyone treated fairly and equally. If you have any further queries, please contact Taslim Bhamji on the email address provided. Kind regards Anthony McCullagh Joint Liquidator Bitcoinica LP (In Liquidation)

Coinabul - 10 Questions With Zhou Tong (Bitcoinica's Founder)

On the Coinabul blog is a fantastic interview with teenage college student and entrepreneur (including being the founder of Bitcoinca) Zhou Tong.  Excerpts:

Zhou: Up to the age of 12, I had no pocket money at all because my family pretty much decided everything for me. The only thing that I had to concentrate on was studying. I was not good at anything else, basically.

Zhou: I still think the cloud was what made Bitcoinica lean. I started on Heroku and spent less than $100 a month to handle million of page requests every month. I outsourced sysadmin, security, banking and everything I couldn’t handle to third parties.

Zhou: Cloud computing enabled Bitcoinica to be started at zero capital and grow up quickly with a very high up-time. I couldn’t really afford a powerful dedicated server when I started running the service.

Zhou: If you seriously want to improve the ideas while having a capability of perfect execution, [don't use or agree to NDAs and] share it with the world and the real high-calibre people will care.

Zhou: Bitcoin will last forever. It’s the first currency or commodity or whatever that relies on Math. Math is all about making general assumptions and proving logically. It never fails under the assumptions.

[Editor's note: Zhou had sold his equity in Bitcoinica to investors prior to the latest hacking incident which has temporarily (hopefully) shuttered the service while it faces some severe challeges.]

A 17 year old coder and entrepreneur named Zhou Tong (pictured below) created a website last year. The growth that his website exhibited is inspirational. In less than 6 months Bitcoinica.com was home to over one million dollars in assets. That young entrepreneur sold Bitcoinica a couple months ago and the new owners are having troubles operating the site securely. Zhou Tong is one spectacular, inspiring, and very young entrepreneur and I had the opportunity to ask him about his experiences. Hopefully the questions I asked will help others achieve the enormous growth his website generated. 

(Pictured above is Zhou Tong, the young creator of Bitcoinica.com)

Q: So, let's start out with the basics. What type of family did you grow up with? What portions of your childhood do you think contributed the most to your character and work ethic?

A: I grew up in an ordinary Chinese extended family with hard-working parents. My grandparents were the ones looking after me in childhood. Up to the age of 12, I had no pocket money at all because my family pretty much decided everything for me. The only thing that I had to concentrate on was studying. I was not good at anything else, basically.

I would say there's nothing interesting in my childhood. No toys, no cartoons and no comic books. I stayed happy because I could always get very good results and everyone in family was proud of me, and luckily I loved most of the compulsory subjects in school - especially Math, Physics, Chemistry and English.

The greatest influence to myself happened after going to Singapore. After being posted to The Affiliated High School of SCNU, the best high school in Guangzhou city, I subsequently received a scholarship offer from Ministry of Education, Singapore. I accepted it with only a few days of consideration, without much understanding about its potential influence to me. Being completely self-independent at 14 was really challenging for a lot of people, and for a long time, I wasn't achieving anything in life. I became lazy, passive and I fell in love.

I didn't really know how to have fun, because I didn't play computer games at all. So I ended up reading books. I bought a few books about PHP, Ruby on Rails, personal finance and startups. At that time, I could use PHP to program a simple meta search engine (to combine search results from different source, de-duplicate and extract keywords). Coding became my only passion because I could get the sense of achievement. I joined my classmate's blog TechXav and started writing tech articles as well (http://www.techxav.com is still alive, but the new owner killed my design and stopped updating. You can still read my articles though.) After I started learning Ruby on Rails, I got a feel about web developers' community and I started to explore the popular philosophy - being small, simple and lean. At the same time, I got a lot of inspiration from books about Tony Hsieh (Zappos), Robert Kiyosaki (Rich Dad) and Steve Jobs. I dreamed about a private library of all O'Reilly books too. 

Every year, I learned more than all previous years since birth combined. And I aim to achieve this in the future.

Q: When you created Bitcoinica, you managed to make a very lean startup, what tips do you have for keeping costs so low?

Being a technical founder, I didn't really need anything to get started. I didn't have money or any partners and I didn't know any investors either. Even though my community members dismissed the importance, I still think the cloud was what made Bitcoinica lean. I started on Heroku and spent less than $100 a month to handle million of page requests every month.  I outsourced sysadmin, security, banking and everything I couldn't handle to third parties. Early users of Bitcoinica even complained about the inability to accept Bitcoin deposits directly (since Bitcoinica handled no Bitcoin wallets at all).

Cloud computing enabled Bitcoinica to be started at zero capital and grow up quickly with a very high up-time. I couldn't really afford a powerful dedicated server when I started running the service.

Q: A lot of community members have commented on your exemplary morals and demeanor. What things do you keep in mind to hold yourself to such a high standard. Do you have any mentors or figures you look up to?

A: I didn't do anything much. For me it was just intuitive to behave like that. Or I can say, I was influenced by Tony Hsieh, Steve Jobs and many startup people. I always have the habit of reading Hacker News everyday so I know the usual way of handling most problems in daily operations.

Q: If you're comfortable with the question, how much did you sell Bitcoinica for? 

A: It was strictly NDA'd. I have only signed one NDA in my life and I don't generally feel comfortable about NDAs. I signed it because I deeply understood the investor's reasoning behind the confidentiality. 

Q: What have you learned during the brief life of Bitcoinica?

a. Customer service is important.

b. A tech startup founder must be a developer.

c. Ideas are worthless.

d. The best way to make money is to generate value for others, and take a cut.

e. Never outsource core competency and always outsource incompetency.

Q: What do you have planned for the future? Will you continue working for yourself? Continue starting new businesses?

A: I have started working on NameTerrific since mid-March. It's another solo venture. I was invited to join a few startups earlier but all of them failed before gaining any traction.

Q: I recall one time when talking to you that you denounced NDAs. What brings/brought you to that opinion?

A: Ideas are worthless. NDA results in adverse selection - only the people who care about you will talk to you. Everyone else is behind the NDA wall. You can't learn from them if you require an NDA. If you seriously want to improve the ideas while having a capability of perfect execution, share it with the world and the real high-calibre people will care.

Q: What is the most important thing aspiring young entrepreneurs should keep in mind when starting a business?

A: Do what you love and love what you do.

Q: What do you think Bitcoin needs to grow? Do you think Bitcoin will last longer than two years?

A: Bitcoin needs a lot of professional developers. The best software people in the Bitcoin world concentrate in the open source project itself. Not many people are actually doing the killer apps. What I see is long development timeframes and low product quality (in most, not all, of these projects). That's one of the reasons that I decide to leave Bitcoin. Honestly, I think the business environment is not up to standard.

Bitcoin will last forever. It's the first currency or commodity or whatever that relies on Math. Math is all about making general assumptions and proving logically. It never fails under the assumptions. Also, it's the best choice for currency for a modern Anarchist state.

Q: I heard you've started a new website! What's it called and what does it do? Do you see it being as successful as Bitcoinica?

NameTerrific. It's a domain registrar (I'm not sure if I can call it a registrar if I'm only a reseller). You can get a powerful DNS powered by Route 53. It's extremely simple to use and set up. Currently it's in early stage of development and I aim to launch in late August.

It's a low-margin business so it's not really comparable to Bitcoinica. Also it's way more scalable than any Bitcoin business in general. So the level of success depends more on my ability to scale (including hiring people) and maintain quality. I can easily calculate the break-even conversion rates so as long as it can pass the proof-of-concept stage by the end of 2012, the business can be run very predictably.

Gone With The Cloud - Bitcoinica Made No DB Backups

Revealed today was something that many traders had begun to suspect -- Bitcoinica kept no "off-site backups".  Not only did Bitcoinica's hacker steal 18K BTC of funds (worth about $80K USD) but that individual had also deleted the Rackspace Cloud Server instances which held the service's customer account and transaction history databases.

The financial service's USD funds remain intact and 80% of their bitcoin funds were kept in an offline wallet, so the only remaining gap that would have been needed to make customers whole was the remaining bitcoin funds (about $80K USD worth).  Without the customer and transaction databases though, the service will have a hard time verifying customer claims.  The claims form asks customers to provide their USD and BTC balances and to choose the qualifier "Exact", "Approximate" or "Guess".

At the time of the hack, many accounts still had open positions in the service's BTC/USD contract for difference market (being either long or short the BTC/USD) so those account balances will be affected by gains or losses when those positions are closed out.  Presumably this will be at the level just under the $5 spot where the BTC/USD was at when the service was hacked.  The claim form asks for the net position and the cost basis for those open positions.  Most individual traders do not keep this type of information to be able to provide an accurate claim.

The service's founder, teenage college-student Zhou Tong, is no longer a part of the organization but is providing information as to what records the service might have available to help administer account recovery.  The service reportedly still has its e-mail messages which sent out verifications for deposits, withdrawals and transaction executions as well as in/out transaction information with financial partners and includes bank transactions as well as redeemable code transactions that transfer funds to and from Bitcoin exchanges.

Organizations that handle customer's funds don't often trust cloud computing for their customer financial transaction data.  This was the second security incident that Bitcoinica had where root access to cloud infrastructure was achieved using attack vectors that wouldn't normally be available for self-managed systems.  As far as recovering, even those organizations that do use cloud infrastructure are advised to have sufficient archives with a recovery plan to recover should the cloud provider have technical issues or should some other service problem arise.

It is possible that the hacker still holds a copy of the database though no public leak has occurred, even though the hacker has communicated in a unique way the message "expect mass leak soon".  Nearly all the stolen bitcoin funds appear to remain unspent by the hacker, though some amount of the funds were given away Robin Hood-style recently.

The service reported that it had about 5,000 accounts though some of those accounts would have low or no USD and BTC balances (e.g., under 1 BTC and/or under $5 USD).  Additionally, some accounts still hold negative balances.  That can occur for accounts that use the highest leverage levels but see forced margin call trading occur during periods when there is great exchange rate volatility.

Many of these accounts were opened with no more information than an e-mail address.  To claim funds, more complete information is required, and in many instances where the claim amounts to any funds of significance it is likely a photo ID will be required.

There will be a few accounts where a lot of money is involved.  A few months ago the service had begun offering interest on USD and BTC balances to attract a wider level of liquidity that would be used for providing leverage to Bitcoinica's customers.

Earlier this week a forum user "tseale" (possibly by Tihan Seale, who is already known for his investment in Bitcoin startup CoinLab) posted information that has yet to be confirmed.  The statement asserts that Bitcoin Consultancy is a General Partner in Bitcoinica LP.  Bitcoinica LP was registered as a Financial Services Provider in March.

The Bitcoinica service had been wildly popular and it had days where nearly a million dollars worth of positions were traded.  For a period of time, those volumes were second only to Mt. Gox, Bitcoin's largest exchange.  There had been plans that Bitcoinica will be reopening but that will depend on a few factors  Servicing customer claims is the organization's first priority and the amount of time it will take to implement proper security measures before reopening is unknown.  As the details emerge of what security and processes had been employed the organization may find it difficult to regain customer's trust.

A competing "forex-like" service, Kronos.io, is likely to end up with a head start over a re-opened Bitcoinca, though there is likely sufficient demand for leveraged trading that more than one service could operate profitably.  Having multiple, separate, providers may even bring stability as leverage extended to Bitcoinica's customers came from the organization's own reserves which were often insufficient for the level of demand.  Traders frustrated by insufficient reserves at Bitcoinica previously had few options elsewhere.

Little did they know at the time that insufficient reserves were about to become the least of their problems.

[Update: A later reply by Zhou Tong in that forum thread does reference “all kinds of records” and specifically describe a set of older records being available which can help in the account reconstruction process. The as-of date for that set of records is purposely not being shared for obvious reasons.]