Using crypto currencies requires a few changes to the typical “work-flow” we are accustomed to with traditional fiat money. Crypto currencies are a mixture of computer science, mathematics, networks, graph theory, game theory, and economics. All of which are hard to understand for the lay person, and in reality should be avoided by such users. Grandma doesn’t need to know the intricacies of TCP/IP and Ethernet to send a cookie recipe to her cousin Martha. Yet, at this exact moment, crypto currencies still have usability and complexity issues. Therefore I have compiled this guide to help people deal with the basic issues of this technology.
Before we begin, we need to know a couple minor details about crypto currency. In general, there is a distributed database called a blockchain. It’s nothing more than a public ledger of all transactions, spread around the Internet. This blockchain gives the currency strength to survive attacks, government regulations or bans, and scaling for performance.
A unit of crypto currency, such as a single Bitcoin is assigned to an address on the blockchain. Whomever controls this address, controls the unity of currency. This address is actually split into two main parts: public key and private key. The private and public keys work with each other to encrypt, decrypt and sign messages into/out of the blockchain. A full understanding of public key encryption is out of scope of this document, but all one needs to know is: there are two keys, public/private, and the private key HAS to be protected with your life.
Tactical and strategic best practices for cryptocurrencies.
If one does NOT have physical control of the private key, one does NOT have physical control of their cryptocurrency.
Exchanges/wallets/ICOs holding your crypto will be controlling your private keys. Exchanges/wallets/ICOs get hacked a lot, THEY ALL GET HACKED. When they do, you LOSE ALL of your crypto.
- 2014 – Mt Gox exchange hacked – $473 Million lost.
- 2015 – Bitstamp exchange hacked – $5.1 Million lost.
- 2016 – DAO hacked – $50 Million lost.
- 2016 – Steemit hacked – $85,000 lost.
- 2016 – Bitfinex hacked – $66 Million lost.
- 2017 – CoinDash hacked – $7 Million lost.
- 2017 – Parity wallet hacked – $32 Million lost.
- 2017 – Veritaseum wallet hacked – $8 Million lost.
- 2017 – Enigma hacked – $500,00 lost.
Notice the acceleration in hacks?
If one does have crypto on an exchange, one must limit the exposure to hacks via the following three rules:
- Minimum amount of crypto on the exchange.
- Minimum amount of time on the exchange.
- Use an exchange which is FDIC insured such as GDAX/Coinbase.
Wallets – Hardware, warm and cold:
A hardware wallet is a small, handheld device which may connect to one’s computer via USB to perform transactions. The device will securely store one’s private and public keys using strong encryption. They usually utilize a web browser to access the crypto currencies for performing transactions after entering the authentication password/PIN. These are good for medium length storage – a few years or until standard USB is removed from all laptops **cough**Apple**cough**.
Cons: Can be pricey, requires a computer, requires Chrome and a chrome app – sometimes buggy, no direct-easy access to private keys(not necessarily a big deal), may not store the crypto currency one desires. Secure storage of back up words may be tough for some.
A warm wallet, is typically an app loaded on one’s computer or phone. The wallet will securely store the private key and make transactions with others as simple as pressing a button, and scanning the QR code of the recipient. Short length storage, put crypto here for immediate, or near term usage. No more than a few weeks.
Pros: Free. Medium security – better than an exchange, but still connected to the same Internet Mr. Hacker is; usage via a phone is very handy for immediate, unexpected payments such as coffee.
Cons: They get hacked. Lose the phone, lose the cash – although there are ways to backup the keys via offline means, and one SHOULD ALWAYS DO THIS.
Pros: Free. A 3rd grader could do this in about two minutes. Go to https://bitaddress.org and after the creation, print the page or scribble down the two long keys. You can see my tutorial for paper wallets here.
Cons: Fire. Water. Theft. To use, one requires a wallet to “sweep” the keys. Not all coins support cold storage, or if they do it’s a giant pain to do so.
If two factor authentication (2fa) is available on an exchange then use it. if UNAVAILABLE, look for a different exchange.
2FA is the technology where the exchange sends a text or uses Google Authenticator to add an extra level of authentication before withdrawals are made. Good stuff. No reason not to use it.
do not let someone else touch, play with, interface, borrow, take pics or get anywhere remotely close to your crypto hardware, software, computers and phones which handle crypto.
People are untrustworthy, slimy, sneaky and will take full advantage of you. Watch out for shoulder surfers and security cameras too.
Buy and hold is the only investment strategy.
You are not the Wolf of Wall Street, but you can be Warren Buffet. In his annual letter [PDF] to shareholders in 2016, Warren revealed the results of a ten year bet with a top hedge fund investor. The results: Hedge Fund Guy: average gain 2.2%. Warren’s single buy and hold purchase enjoyed a gain of 85.4%.
BUY AND HOLD
Bitcoin is the only coin. all other coins want to be bitcoin.
That is not to say other coins are bad. Bitcoin is the oldest, and most proven coin with the widest adoption. Use other coins to trade into Bitcoin. Use other coins for paying for things. I like Litecoin for small, cheap and fast transactions. Use Bitcoin as gold, and stash it away forever.
do not coin chase. crypto is not a get rich scheme.
There are over 1,000 coins/assets. Which one will be a winner? Impossible to know. Which one will be gone in a year, probably half. There are giant lists of dead coins out there. Four years ago there were only fifteen coins, look here. Thirteen of those fifteen coins are gone to the bottom of the list. Namecoin was #3, and now is #124. BBQcoin was #13, and now #828. Think about it.
Let’s look at last years top fifteen coins, compared to today’s top twenty coins and how they have moved in the ranking:
1 -> 1
2 -> 2
3 -> 4
4 -> 5
5 -> 8
6 -> 10
7 -> 21
8 -> 6
9 -> 7
10 -> 28
11 -> 38
12 -> 14
13 – > 34
14 -> 63
15 -> 40
Do you see what I am seeing? Only TWO coins went UP and only TWO coins held their position. ALL of the rest dropped position – some SIGNIFICANTLY.
In conclusion, always do you your research. Avoid Initial Coin Offerings(ICO) and anything which seems too good to be true. Ignore any feelings of Fear of Missing Out (FOMO).