Hackers found a way to steal Bitcoin without private keys

Bitcoin wallet Electrum has patched a security flaw that allowed hackers to redirect payments when users tried to increase transaction fees.

The developers disclosed the vulnerability on Oct. 24, confirming that malicious servers had exploited the weakness and that at least one user lost Bitcoin after unknowingly approving a fraudulent transaction.

The high-severity vulnerability affects Electrum versions earlier than 4.8.3. It exploits the wallet's reliance on external servers to track unconfirmed transactions, allowing attackers to manipulate the payment information users see before they authorize additional fees.

The disclosure followed two complaints received on Oct. 11 and Oct. 18. The first user noticed an unfamiliar transaction appearing in their wallet after broadcasting a payment, while the second reported losing funds after attempting to accelerate a pending transfer.

Both incidents involved attackers generating Bitcoin addresses that matched the final four characters of the intended recipients' addresses, potentially deceiving users who relied on partial address checks.

Electrum did not disclose the amount stolen, although its maintainers confirmed that some servers were actively carrying out the attack.

How hackers turned Bitcoin fee adjustments into unauthorized payments

The exploit takes advantage of a weakness in how Electrum processes transaction information supplied by its connected servers.

When a user broadcasts a Bitcoin payment, a malicious server can withhold the transaction from the network and instead supply a conflicting version that redirects the funds to an attacker-controlled address.

The fraudulent transaction initially contains invalid signatures, meaning it cannot be processed as a legitimate payment. However, affected Electrum clients failed to verify those signatures before displaying the substituted transaction in the wallet's unconfirmed history.

As a result, the legitimate payment disappears from that view, leaving the user with a manipulated transaction that appears to be awaiting confirmation.

The attacker can then exploit Bitcoin's Replace-by-Fee feature, which allows users to increase transaction fees to encourage miners to confirm delayed payments.

If the victim manually increases the fee on the substituted transaction, Electrum generates fresh signatures authorizing its altered payment details. That approval makes the attacker-directed transaction valid, allowing the funds to transfer without compromising the user's private keys.

In the Oct. 18 incident, the attackers reportedly set the fraudulent transaction fee to zero, potentially encouraging the victim to raise it.

The case shows how a routine wallet function can become a theft mechanism when the client accepts transaction details from an untrusted server without adequate verification.

Electrum's latest release introduces signature checks for wallet-owned inputs before unconfirmed transactions enter the client's local history, preventing the reported substitution technique from reaching the fee-adjustment stage.

The developers tagged version 4.8.3 on Oct. 23 and distributed the updated software on Oct. 24, alongside the public security disclosure.

They advised users to download the patch from Electrum's official website and verify complete recipient addresses and payment amounts whenever signing transactions.

The advisory also says clients connected exclusively to trusted servers, including privately operated ones, are not exposed to this attack. The patch does not extend signature verification to every incoming transaction.