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Is it possible for a sinister entity to peek into the p2p network of bitcoin and manipulate it in such a way so as to compromise a certain transaction?

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What you are asking is, does Bitcoin have a vulnerability where if a computer system is compromised can the attacker steal money.

The Bitcoin network is a decentralized, peer-to-peer network. There is no "master node" that controls a ledger.

As such, there is no central place to compromise.

When a person is using the Bitcoin.org client (e.g., Bitcoin-Qt) on a local computer, that transaction is cryptographically signed and broadcast to peers. There's nothing a compromised peer can do with that transaction other than relay it or not relay it. It is a signed transaction and only the party being paid has any control over spending funds from that point on.

So for the Bitcoin network itself, a compromise of "certain peers", or other nodes -- even those mining, does not make it possibly for funds to be stolen.

Now there are third-party services that offer hosted (shared) EWallets. Mt. Gox is one. Coinbase is another. Instawallet, EasyWallet, and bitZino are examples of others. Now if those services are compromised then that's when you are exposed to risk of loss. And most every loss that has occurred was the result of inadquate security practices at third parties.

That doesn't mean you have no risk of loss. If your own computer is compromised you could be at risk of losing your bitcoins. The Bitcoin.org client does have "passphrase encryption" to protect the private keys in your wallet but certain malware can see the keystrokes you type in and with access to the wallet data file can perform a replay attack to spend your funds in your wallet.

There are varying levels of secure methods for holding and using bitcoins. Which approach will work best for you depends on your technical skills, the amount you are planning to hold, and a few other factors. Some people use paper wallets, created offline, for storing larger amounts, and then use a mobile wallet (e.g., Blockchain for Android) for "walking around money".

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No. However a machine with that person's bitcoins on it can be compromized and their bitcoins can be stolen.

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