If you have been following the media at all, you no doubt have run into the topic of Bitcoins and how their value keeps on skyrocketing. Stories of early adopters becoming millionaires are in the covers of just about every publication these days. With the stories comes thousands upon thousands of people looking to invest and cash in on the phenomenon.
Interested in cryptocurrencies? Understand the concept before going all-in.
December 22, 2017 at 11:41
My colleague Matti Suominen wrote a nice article regarding the dangers of Bitcoin wallets (or cryptocurrencies in general). This reminded me that in addition to the wallets there are many other things one should understand before making all-in investments in to cryptocurrencies such as Bitcoin.
The cryptocurrencies have some great upsides compared to traditional banks and credit cards such as speed of money exchange, independence from traditional banks and less fees but in exchange these new forms of money also have some downsides. The list below is by no means comprehensive but should give you a quick idea of the caveats resulting from absence of traditional banks and society controls.
If you don’t understand the concept – do not invest into it
This guideline is old and actually one of the sound principles used by master investor Warren Buffett but it applies here too. If your only motivation for going onboard with any new trendy thing is to get rich fast without understanding the pros and cons it might backfire very quickly.
Laws of the normal society will not protect you
Traditional law enforcement very likely cannot help you if you become a victim of robbery in online world as the jurisdictions and investigations are really complicated. One key difference between traditional money (euros, dollars, …) and cryptocurrencies is that there is no bank or authorities who can help you if someone steals your money. With traditional money both authorities (police, justice system, …) and banks can trace and in many cases recover your lost money but this is not true with Bitcoin. The money stolen from your wallet will be lost, period. In similar fashion, if you accidentally send the money to wrong wallet there is no mechanism to recover it (unless the recipient is really generous).
Lost wallet / key means that money will be lost for good
This is another key difference between traditional bank systems and cryptocurrencies. In traditional case if you lose your wallet or credit cards you can reclaim access to your money in the bank by visiting the physical bank office and prevent credit card frauds by calling the credit card company. Neither of these protections exist in digital world. If you wallet is stolen (see Matti’s article) the money will be lost. Even if no one steals your wallet but you lose the access to it your money will be lost. The ways you can lose the access vary depending if you are using online service as wallet or storing the wallet in your computer but in both case the ultimate risk is the same. If you store the money in online wallet, any breach in the online system may result you losing the money or you may lose the money if you cannot anymore access the wallet due to lost password. If you store the wallet (and the secret key it uses) in local computer you may lose your money if the computer disk crashes and you have not made proper backups. So always remember to back-up! Some studies estimate that nearly 20% of all Bitcoins have bene lost completely (http://uk.businessinsider.com/nearly-4-million-bitcoins-have-been-lost-forever-study-says-2017-11?IR=T).
It’s not 100% anonymous
While many new articles have recently told us that Bitcoin is anonymous and popular with criminals it does not mean it would be 100% bulletproof. Unlike cash in real world, every single transaction (payment) with cryptocurrencies can be traced. You can only use it completely anonymously if you can hide your identity always and figure out a way to exchange cryptocurrencies to physical goods without leaving any trace to yourself. So don’t think the cryptocurrencies automatically protect you from everything unless you really understand the concept of staying invisible in digital world.
Protect your computer!
Like Matti wrote, the worst case scenario is that someone gains access to your computer and can actively attack your wallet. Like mentioned above, police and banks cannot help you with cryptocurrencies and thus you have to protect yourself (actually, in some ways this is same as storing cash under your mattress). So have anti-malware software on your computer, beware of phishing and scams, use only legit and known software, use strong authentication and so on.