Bitcoin – Miners, Cryptocurrencies and ponzi schemes. Getting started.

InfoTrust customers are increasingly becoming involved in using Cryptocurrencies, namely Bitcoin, for various reasons. We have received many questions highlighting that customers have a wide range of understanding of this environment and rarely understand the potential threats relating to their activities. Based on this, the team here at InfoTrust have been working on putting together a quick overview of Cryptocurrencies, what they are used for, and some of the threats of dealing with Cryptocurrencies in general. We’ll also ensure that we highlight some of the threats and provide tips on improving your security whilst transacting in this environment.

Cryptocurrencies are generally based on a technology called “The Block Chain.” The Block Chain is a distributed public ledger of transactions, designed to be secure by being replicated in multiple locations and allowing transactions (or blocks) to continually be updated and reconciled, the technology at least, it is inherently secure. Whilst there are scenarios where it could be maliciously manipulated, they are highly unlikely at this point. Never say never right?

The Block Chain thus allows any transactions to be tracked, be it Bitcoins, legal contracts, or at the lower end, updates to shared documents and spreadsheets. It enables financial transactions without banks, but this freedom comes with risk.

Bitcoin is Block Chain based, as are most other Cryptocurrencies. Bitcoin is simply a user-friendly name and face to an implementation of the blockchain attempting to simplify transactions to the point that it will be widely adopted. A Bitcoin wallet is where you send and receive all of your BC as well as recording your transaction history. Most online services store this wallet for you online and provide the user interfaces to enable these transactions, however, they have become highly valuable targets for hackers. Your wallet is the most critical element here, loss of wallet access means the loss of your BC. We have seen so many stories of corrupt USB drives, or stolen laptops, leading to millions in losses.

If BC can build credibility as a legitimate currency it will gain value which is what we have witnessed. Long-term the value must come from its usefulness to transact, not speculation which causes price volatility. Essentially the biggest problem with Bitcoin today is that some reports estimate that around 4% of Bitcoin buyers control around 95% of the total Bitcoins mined to date. Bloomberg suggests that 1,000 individuals control 40% of the market. This gives that group extraordinary power to influence the market, both good and bad.

Personally, when Googling topics, the Wikipedia results are typically high on the first page, but in pulling together some of the definitions here it became clear that Bitcoin price details occupied the first page of Google results, with Wikipedia relegated to page two. Search, being a great indicator of global sentiment, therefore suggests that everyone is vastly more interested in the Bitcoin price rather than technical understanding. Scary? It should be.

So what are some of the common pitfalls and what are our tips to help you reduce your overall risk?

Looking at common Bitcoin pitfalls, there are a few standouts, these are:

  1. Market volatility.
  2. Exchange reputation, and
  3. Your ability to “cash out”

Some basic steps to reduce your overall risk:

  1. Market volatility: Whilst you can’t really do a lot to change the market or predict the changes, you can limit your time in the market to minimize the impact of this volatility. Assuming you are using BC for legitimate transactions, refrain from holding BC for long time frames for a specific transaction. If you buy the required BC and spend it quickly, you can significantly reduce your exposure to an unpredictable value.
  2. Exchange reputation: Entrusting all of your BC to a single exchange or company is a highly risky activity at this point. Mt Gox which at its height was handling approx. 70% of global BC transactions lost 850,000 customer BC after a security related issue. Too big to fail, well not quite. It went into receivership and the lawyers were rolled in. The lesson here is that diversifying your exchanges and BC holdings across numerous providers is your key to minimizing the impact of any single point of failure. It also protects you from “runs on the market” which may create a technology based denial of service where you can’t transact to extract your money.
  3. Cashing out: Speculators often don’t like getting tied up in details, but many Aussies have been caught out by the fact that some of the most popular applications and exchanges have no arrangements for Australian customers to cash out locally. They can’t transfer funds back into their bank accounts locally. This is not a unique issue for non-US geographies and a detail that needs to be very seriously considered prior to transferring funds to these organisations. Our recommendation is that you check the fine print before signing up.

So for customers with cryptocurrency questions we hope this very brief primer is a good first step to understanding the basics and giving you a few pointers on things to watch out for. At the very least we hope to have provided you with enough of the jargon to help your personal research, and please remember we are NOT financial advisors and this post should in no way be regarded as financial advice.

Stay tuned for our next post in the Bitcoin series – Bitcoin and Ransomware.

The InfoTrust team.

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