Cryptocurrency is one of the hottest topics in today’s business sector. The first and most well-known cryptocurrency was Bitcoin. Launched in 2009, Bitcoin went from something only computer geeks and hackers talked about to a global phenomenon that’s transformed how the entire world views money.
As of November 2017, a single Bitcoin was worth more than $10,000, with the currency’s total market capitalization at roughly $158 billion. Bitcoin’s explosive success spawned a legion of other coins, known as “altcoins,” such as Ethereum, Litecoin, and Ripple, and the global market value for all cryptocurrency is currently more than $300 billion.
With such huge amounts of money transitioning into the world of cryptocurrency, it’s no wonder entrepreneurs are flocking to it, whether they’re using it to conduct business transactions, raise funds for their startup, or as an investment vehicle. However, because it’s largely unregulated, involves extremely complex technology, and offers significant anonymity, the cryptocurrency market has also become a haven for cyber criminals.
The brief history of cryptocurrency is littered with stories of people losing major money through hacking, along with a variety of other traps and scams. As with any new technology, the key to safety when dealing with cryptocurrency is education. While business owners should do their own research before dipping their toes into the “crypto” waters, here are four of the most common scams to look out for and how to know whether investing in or using cryptocurrency is right for you and your business.
A cryptocurrency exchange is an online platform for trading one cryptocurrency for another or for fiat currency, like the U.S. dollar. These platforms are where you buy in and cash out your cryptocurrency, so they’re essential to the crypto market. Exchanges typically charge a fee for each transaction and are based on current market rates or rates set by sellers/brokers.
Bitcoin’s popularity has caused the number of exchanges to explode, but not all exchanges are trustworthy. In the past, popular exchanges have disappeared overnight and taken all of the digital currency with them, while others offer horrible customer service, and/or make getting your money out extremely difficult.
Your best bet is to stick with the largest, most popular exchanges like Coinbase, Kraken, and Bittrex. That said, legitimate smaller exchanges are out there and can be used safely, provided you’ve done your research. Indeed, there are numerous websites that rank and review exchanges for quality, security, and customer service. If the reviews are largely negative, note that it’s difficult to cash out your altcoins, or mention the customer service is exceptionally poor and/or slow, steer clear.
In order to store cryptocurrency, you’ll want a digital wallet, as that’s the safest way to hold your cryptocurrency. Exchanges are for buying and selling, but not the safest for storing.
Your cryptocurrency wallet doesn’t actually “store” money like a traditional wallet; rather, it stores passcodes, known as keys, that allow you to send and receive digital currency to and from the wallet. There are many different wallets available, but not all of them are totally secure.
Wallets come in two forms: hot and cold. A “hot” wallet stores your cryptocurrency in a location that’s connected to the internet—exchange-based wallets, desktop wallets, and mobile wallets. Because they’re connected to the internet, hot wallets are the most convenient, but that also makes them vulnerable to hacking. A “cold” wallet, conversely, stores your cryptocurrency in a location that’s completely offline. Ironically, the most secure type of wallet for storing digital currency is a cold “paper” wallet.
Paper wallets involve printing out your keys and storing them in a secure location. While paper wallets are the most secure option, if you lose the codes, it’s the same as losing paper currency—you’re screwed. And there is no way to recover your investment. Paper wallets are also inconvenient—you have to send your money back to an exchange to use it—which can be a pain if you’re using cryptocurrency on a daily basis.
If you primarily use cryptocurrency as a long-term investment, you should store all of your crypto in a paper wallet. If you’re receiving, spending, or trading frequently, however, you should use both a hot/online and paper/offline wallet. Like real-world wallets, store the money you need for the day in your hot/online wallet, but keep the majority of your funds in a paper/offline wallet for safekeeping.
In all cases, whether you have crypto in a hot wallet, paper wallet, or directly in an exchange, make sure you’ve given the details of where it’s stored and how to access it to the people who need to know in case you’re incapacitated or when you die. Otherwise, it’s completely lost. If the people you love don’t know how to find and access it, it’s the same as it not existing at all.
In addition to safety, cryptocurrency raises a whole sea of other complexities for business owners to navigate in terms of finances, taxes, and legal issues. Fortunately, a Creative Business Lawyer® can help you with these challenges, so contact one today to get the most bang for your crypto buck.
Next week, we’ll continue with part two in this series on cryptocurrency risks and scams.