Bitcoin Bandits: The Most Infamous Bitcoin Heists in History

Today bank robbers have traded in their masks and pistols for keyboards and coding, orchestrating some of the most infamous heists not in bank vaults or armored trucks, but on the blockchain. So, of course, from this Bitcoin has become a prime target for cybercriminals.

For today's BitByte article, we unravel the tales of the most notorious Bitcoin bandits and the heists that shook the crypto world.

The Mt. Gox Meltdown

Perhaps no other Bitcoin heist is as synonymous with cryptocurrency crime as the collapse of Mt. Gox. Once the world's largest Bitcoin exchange, Mt. Gox declared bankruptcy in 2014 after admitting to losing 850,000 BTC, valued at approximately $450 million at that time, which is $31,322,500,000 today (that is $31 Billion, with a B)!

The heist was a slow bleed; a combination of security lapses, poor management, and nefarious activity that went unnoticed for years. It wasn't just a massive financial blow to the investors; it was a stark reminder of the fragility of third-party trust.

In March 2014, Mt. Gox claimed to have found 200,000 Bitcoin in an old wallet, reducing the number of lost Bitcoin to 650,000. In 2015, the company's CEO, Mark Karpelès, was arrested and charged with data manipulation and embezzlement, but in 2019 he was found guilty only of falsifying data, avoiding prison with a suspended sentence.

Creditors of Mt. Gox claimed losses of $2.4 trillion but the trustee only recovered $91 million to distribute. As of July 2022, a Japanese trustee reported holding close to 142,000 Bitcoin, with compensation payments to creditors scheduled to begin by late 2023.

The Bitfinex Breach

In August 2016, Bitfinex, a prominent Hong Kong-based exchange, reported a security breach that led to the theft nearly 120,000 Bitcoin. Hackers targeted the exchange's multi-signature wallets—a security feature requiring multiple keys for transaction authorization—and managed to run away with 119,756 Bitcoin, valued at approximately $72 million at the time.

However, the saga didn't end there. Several years later, in February 2022, a breakthrough occurred when the U.S. government recovered a significant portion of the stolen Bitcoin, which had ballooned in value to $3.6 billion. The success was due to law enforcement decrypting a file that contained addresses and private keys linked to the stolen funds. The file belonged to Ilya Lichtenstein and implicated him and his wife, Heather R. Morgan, in the laundering of the stolen Bitcoin.

In an unexpected twist, over a year after the recovery, Lichtenstein came forward in August 2023, confessing to the original theft. Following this revelation, both Lichtenstein and Morgan entered guilty pleas to charges of money laundering.

The Not-So-Nice NiceHash Nab

NiceHash, a platform that allowed users to sell their computing power to those looking to mine Bitcoin, fell victim to a sophisticated hacking operation in 2017. The assailants managed to empty the company's entire Bitcoin wallet, making off with around 4,700 BTC, valued at over $60 million at the time of the crime. This heist didn't just affect the company; it impacted a vast community of individual miners, turning the dream of digital gold into dust.

The BitFloor Break-In

In September 2012, BitFloor, a Bitcoin exchange that was gaining traction, experienced a severe security breach. An unauthorized party accessed an unencrypted backup of wallet keys and stole approximately 24,000 BTC, worth around $250,000 at the time, which is $887,071,200 today.

The theft caused a temporary shutdown of the exchange, and while BitFloor resumed operations for a period after the incident, it eventually closed its doors. The BitFloor heist is a tale of caution against the pitfalls of inadequate security practices, particularly the risks of storing unencrypted sensitive information.

The Sheep Marketplace Scam

In December 2013, users of the dark web marketplace Sheep Marketplace were shocked to discover that the site had shut down. Shortly after, Sheep Marketplace disclosed that a vendor had exploited a site vulnerability to snatch up 5,400 Bitcoin, an amount valued at approximately $6 million at the time ($199,490,580 today). The marketplace, which dealt primarily with illicit goods, was an alternative to the infamous Silk Road, which had been recently shut down by the FBI. As the site went offline, users speculated whether it was a hack or an elaborate exit scam by the site's administrators.

The skepticism intensified when users traced a suspicious transfer of nearly 40,000 Bitcoin, suggesting that the administrators might have held significantly more than the declared stolen amount. In a concerted effort to unveil the perpetrator, victims began sending "tagged" Bitcoin to the thief's accounts, utilizing the public ledger of Bitcoin transactions to track the movement of the stolen currency. The chase heated up when a massive transaction of 96,000 Bitcoin was detected, processed by Bitcoin Fog, a tumbler service known for hiding (or washing/cleaning) the origins of the Bitcoin. The sheer size of the transaction overwhelmed Bitcoin Fog's systems, ironically making the funds traceable.

The pursuit of justice finished in May 2016 with the arrest of two Florida men, Sean Mackert and Nathan Gibson, both 21-year-old students at the time. The arrests were made possible by tracing Bitcoin transactions through Coinbase. After a thorough investigation, Mackert and Gibson pleaded guilty in 2018 to Bitcoin wire fraud in connection with the Sheep Marketplace heist.

Approximately $4 million worth of the stolen Bitcoin has been recovered and seized.

The Lessons To Learn From These Hacks

These chronicles of Bitcoin heists serve as a collection of cautionary tales for Bitcoiners and anyone involved in the cryptocurrency industry. This article not only details the criminal feats but also the vulnerabilities that were exploited. Here are some key lessons to be learned from these infamous digital heists:

1. Never Underestimate Security: Each heist underlines the importance of robust security protocols. Implementing multi-factor authentication, cold storage, and regular security audits can mitigate risks.
2. Always Encrypt Sensitive Data: The BitFloor incident reminds us that encryption is a must. Sensitive data should always be encrypted, especially when stored or backed up.
3. Educate and Beware of Phishing Scams: Users must be educated about the dangers of phishing scams, which are often the first step in a security breach.
4. Regularly Update and Patch Software: Keeping software updated is crucial. Many exploits take advantage of outdated systems with known vulnerabilities.
5. Transparency Is Key: Exchanges and platforms need to maintain transparency with their users, especially concerning security practices and fund storage. Deal only with reputable and well-vetted platforms. Research their history, security practices, and user reviews.
6. Use Hardware Wallets for Significant Amounts: For larger amounts of Bitcoin, consider using hardware wallets. These physical devices provide an extra layer of security by keeping your private key offline.
7. Beware of Mobile Wallet Risks: While mobile wallets offer convenience and have their place in the market, they can also be more susceptible to hacking. Ensure your mobile device is secure and consider the risks before using a mobile wallet for significant sums. Only store what you're willing to lose in a mobile wallet.
8. Not Your Keys, Not Your Coins: This mantra underlines the importance of personal ownership of your Bitcoin holdings. Following the above, hot wallets, while convenient, are susceptible to online breaches. To safeguard your investments, prioritize the use of cold storage solutions for holding significant amounts of Bitcoin, ensuring that you—and only you—control the private keys and, by extension, your wealth.
9. Backup Your Wallet: Just like any important data, backup your wallet regularly, and make sure your backups are stored in a secure location separate from your primary wallet.
10. Community Vigilance: The community plays a critical role in security. Join an online or in-person Bitcoin community to stay up-to-date on all things security and privacy for your Bitcoin bag.

Tl;dr - Be smart and use common sense.

Final Thoughts

Each of the heists mentioned have a unique place in the archives of Bitcoin's history, not just for their scale but for the lessons they give us. As Bitcoin continues to carve out its place in the financial ecosystem, these heists are stark reminders of how quickly things can go bad if you are not being smart and safe with your Bitcoin. They remind us that in the pursuit of financial revolution, security can never be an afterthought.

In this time of rapid and unprecedented digital innovation, these Bitcoin heists serve as both cautionary tales and catalysts for growth. They remind us that while the march of technology is relentless, the principles of vigilance, security, privacy and education are timeless.

As you continue your journey as a Bitcoiner, carry these lessons of the past with you to educate and guide you in securely buying and holding your precious Bitcoin.

And remember: Don't trust, verify. Not your keys, not your coins.