Bitcoin has touched record highs and crypto-currencies are fast catching the attention of all investors (including Grandmoms) as everyone wants to be on-board. In this euphoria coupled with the fear of missing out, individual investors tend to overlook health-checks and warning signs. Moreover, because cryptos are unregulated (for now), most individual investors are simply unaware of the pitfalls which could result in serious erosion to their wealth. In this article, we delve into the mechanisms of crypto exchanges & wallets, and the essentials to safeguard your crypto-currencies assets.
PS: Today, we are releasing December’17 portfolio report with our paid members. This year our MultiCAP Multibagger portfolio has generated 55% returns till date and has beaten benchmark & almost all mutual funds by a handsome margin. With recent changes in portfolio we are confident to ride high in 2018 as well. Cheers!
Back to the article, I had an interesting conversation with a friend recently who happened to enquire if I knew bitcoin. I replied “Yeah, sort of”. His response was telling. He said “You have no idea what you’re missing out on! I bought bitcoin & bitcoin cash (BCH) 3 months ago and both have already more than doubled. I wish I had put in more. But you don’t waste any more time, buy as soon as possible.” He went on to explain where his accounts were and how he transacted. Those couple of minutes of talk summed up the situation perfectly. Euphoria, greed, fear of missing out, blind eye of the risks involved and plain lack of awareness to the working of crypto-currencies. A lot of people seem unaware of what they are getting into and how to protect their hard earned money.
There are two components for owning crypto-currencies today: Exchanges and Wallets.
These are online platforms which facilitate exchange of fiat currencies for crypto currencies. These are gateways into the crypto world. Bitcoins and ethers can be bought on most popular exchanges, but most altcoins like Ripple, Litecoin, Dash & Monero are largely being exchanged for bitcoins & ethers (for now, anyway) in altcoin exchanges.
- Facilitates buying into almost any cryptocurrency
- Each exchange offers different rates, charges different fees/commission; giving new users plenty of options to choose.
- While cryptocurrency networks themselves are robust and secure, the infrastructure servicing these networks (both exchanges and wallets) are vulnerable to cyber-attacks. Security of each solution provider (exchange or wallet) has to be evaluated independently and frequently. Most popular crypto brokers like Coinbase offer both exchange and wallet. However, keeping your cryptos with the exchange is fraught with danger. Recently, $64m in crypto-currency were stolen from mining marketplace NiceHash by a professional hacking attack. Undoubtedly, people who bought and kept their assets on NiceHash exchange were impacted. The only function of exchanges is to buy and sell crypto-currencies and they should not be used as storage of large value assets.
Wallet is an interface (software, hardware or paper) where crypto-currencies are stored*. These are akin to digital wallets in conventional banking terms where password and two factor authentication is required to transact.
- *Crypto-currencies are not actually stored in any wallet unlike conventional dollar bills. Wallets only store your public and private keys which in-turn allow you access to assets on crypto network.
- Public Key is the key to be shared with others as an address to receive crypto-currencies. This is akin to a bank account number in conventional banking sense.
- Private Key is a secret key which is to be used to authenticate transactions. This is akin to password in online banking.
Types of Wallets
1. Hot Wallets: Wallets which are online and connected to the internet are called hot wallets. These include desktop wallets, mobile wallets and multi-platform cloud wallets.
- Handy for day to day transactions/trading
- Easy to backup – Less likely to lose private key by accident
- Upgradable security features (by the wallet provider)
- If it is online, so prone to attack.
2. Cold Wallets: Wallets which are not connected to the internet are called cold wallets. These can be hardware (USB) wallets or a simple paper wallet (yes, just a piece of paper that has your private key or QR code)
- Offline, thus less prone to attack. Hardware wallets are usually USB sticks and thus have a fixed onetime cost for buying them
- Onus of protection is entirely on the individual. There is potential for theft or accidental loss/misplacement.
Ok, how to go about it?
Crypto investment can be a risky affair if basic sanity & due diligence is not done. As with all investments, discipline is vital to safeguard long term interests. We believe that diversification is the best policy in the current fast-changing market. Do not park your cryptos with the exchanges. Keep only the quantity which is needed for short term trading/transacting in exchanges. Maintain both hot and cold wallets. Use the hot wallet for transactional purposes (fund transfer, bill payments, etc) and cold wallet for holding long term high value crypto assets.
Warren Buffet famously advised investors not to invest in businesses they don’t understand. While this is true, the converse is equally true for AI. When we do understand the nuts and bolts of complex investments/businesses, we do not hold back advising our clients of opportunities and risks at the right time. Join the crypto bandwagon by all means but be on a firm footing. Do all you can to safeguard your money, your identity and your passwords.
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