Cryptocurrencies and Cold Wallets

Friday, May 31 2019 05:52 PM

We love cryptocurrencies.

The idea of using bitcoin to speedily, conveniently and inexpensively make or receive payments — and all without using any intermediary — anywhere in the world is a game-changer, a financial revolution, an Idea Whose Time Has Come. (Satoshi, what took you so long?)

In a world where data was the new gold / competitive advantage, in the era of the Internet and smartphones, in an integrated globalised economic system where vendors could come from half-way around the world, it seems to us that money flows hadn’t kept pace — until cryptos arrived.

Of course, there’s the flip side: a system such as the blockchain that allows no possibility of reversing a fraudulent or mistaken financial transaction demands greater care and diligence from us, the user. A digital currency with no intermediary to act as a guarantor provides no recourse in the event of theft, carelessness or other kinds of errors.

And, as if on cue, theft is happening — and the numbers are staggering.

Remember watching the bank hold-ups in Westerns of old? Gun-toting outlaws would burst into a bank and make off with all the cash they could gather.

Today, why do you need a gun when you have programming skills? There is a new kind of bank, and there is a new breed of outlaws around the block (no pun intended).

Crypto exchanges — digital marketplaces where people can buy, sell, and store cryptos — are the new banks. They make transacting in cryptos — between fiat currency and cryptos, between the numerous cryptos — very convenient, but users have also bought in a big way to storing their cryptos on these exchanges (‘hot wallets’), again for convenience.

As of 16 May 2019, the market capitalisation of all cryptos was US$246 billion (by comparison, Singapore’s GDP was US$324 billion in 2017). It is reasonable to assume that a sizeable proportion of this is stored on crypto exchanges.

With such a huge amount stored on crypto exchanges, literally a keyboard away, there has been a surge of hacking activity targeting exchanges.

The first known hack on a crypto exchange happened in June 2011 to Mt Gox, then the largest and most important first-generation crypto exchange in the world. US$8.75 million was stolen. Then in 2014, the hapless, reportedly-badly-managed exchange got robbed again, this time to the tune of US$473 million worth of bitcoin, around 7% of the world’s supply of bitcoin then.

The biggest attack (that we know of) in the history of cryptos occurred in January 2018. Coincheck, one of the largest crypto exchanges in Japan, lost a staggering US$532 million. This was by no means an isolated event: three of the top six crypto exchange hacks in history occurred in 2018 — and that too only by June 2018.

The Wall Street Journal has estimated that more than US$800 million was stolen from five crypto exchanges in 2018 alone (higher than any year before). Reuters reported in 2016 that almost one-third of bitcoin exchanges and trading platforms had been hacked. More than 36 exchanges have closed after getting hacked or because of government regulations.

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Exchange hacks and closures will continue to be a common occurrence. With no intermediaries in the crypto world, whom do you think the entire responsibility of due diligence, risk management, and basic housekeeping falls on? Yes: you.

But what practical steps can you take to balance the benefits of using cryptos with the risks of using and storing them? How can Privacy meet Protection?

Cue cold wallets (also hardware wallets). The idea is to electronically store your crypto on a platform that is not connected to the Internet so hackers can’t get at it. The two most common types are hardware devices and cold storage coins.

As with valuables, heirlooms, physical (paper) copies of important electronic documents, etc, you want to keep your cold wallets somewhere that’s secure, accessible 24x7, and discreet.

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Remember, technology is a pliable servant, but it can be a dangerous master.

With technology comes both convenience and risk. The old, common-sense rules of survival in an uncertain world that have served us so well in the past haven’t disappeared; they’ve just changed with the times.

You still never put all your eggs in one basket (you diversify both assets and storage locations); you still institute multiple levels of security (2FA or 3FA); and you still maintain 24x7 private vaults for storage of valuables (minimising the risk of theft, appropriation, fire, flood, etc).

Welcome to the Brave New World of Cryptos. Just don’t forget the security hacks your battle-hardened ancestors swore by.

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Information accurate at the time of publishing.

Sources:

  1. Crypto Exchanges: Hacks and Bankruptcies in 2018, https://decenter.org/en/crypto-exchanges-hacks-and-bankruptcies-in-2018
  2. 30+ Cryptocurrency Exchange Hacks – A Comprehensive List, 21 Jun 2018 https://coiniq.com/cryptocurrency-exchange-hacks/
  3. Research: A Third of Bitcoin Exchanges Have Been Hacked, https://www.ccn.com/research-a-third-of-bitcoin-exchanges-have-been-hacked

Copyright © Vault@268 Pte Ltd   Author: Vinay Kumar Rai




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