Investing in bitcoin and other cryptocurrencies come with an extra layer of risks compared to regular investments. Due to the nature and state of cryptocurrencies, an investor will have to consider the risks of cyberattacks, unpredictable price fluctuations, and uncertain government regulations.
For investors—and of course, cryptocurrency operators—cyberattacks are the greatest nightmare, a clear reminder of how slippery virtual currencies can be. Put in perspective, security breaches which lead to loss of investors can have effects as devastating as a total shutdown of a cryptocurrency business. Last year (2017), South-Korean based cryptocurrency exchange Youbit went bankrupt following a cyberheist that cost 17 percent of the exchange’s assets.
Throw in the volatile price swings now associated with cryptocurrencies and it’s easy to understand why prospective investors apply some restraint from hopping into the market. The price of Bitcoin plunged from a peak of almost $20,000 in December to less than half its price by the end of Q1 2019. It dipped further in April hitting a bottom below $7000 before the latest resurgence that has seen it climb above $9,000 and moving towards $10,000. The fact that price gains (and losses) happened in short time spans is worrisome for most regular investors.
Like bitcoin, most other cryptocurrencies are subject to major price fluctuations. Ethereum (ETH), which is the second largest cryptocurrency with a market cap of $74 billion experiences regular bumpy rides. Ether came from being the worst performing major cryptocurrency in March to become one of the best gainers in April amassing as it currently trades around $800. Like bitcoin, ethereum lost a huge percent of its value from $1400 in January to below 400 in April.
Bitcoin is a security, a property, and a currency depending on which regulatory agency you choose to follow. That’s the level of confusion surrounding the regulation of cryptocurrencies; this just within the United States.
The Security and Exchange Commission considers bitcoins and other cryptocurrencies as securities while the Internal Revenue Service (IRS), responsible for taxation consider them as property. Financial Crimes Enforcement Network bucks the trend by treating cryptocurrencies as currency.
Cryptocurrency Hacks – A nightmare for both Operators and Investors
Youbit’s case is not a one-off; it exemplifies the risks crypto investors face on a daily basis for investing in digital currencies which are special targets for cybercriminals. Because of the decentralized nature of cryptocurrencies, it is easy to transfer bitcoin and other cryptocurrencies without the identity of the recipient being traced.
The rate these attacks have increased with the growth in cryptocurrency volumes. With more Initial Coin Offerings and more coins come cyber criminals leading to more attacks on cryptocurrency trading platforms and storage devices.
Attacks on Cryptocurrency Exchanges
Cryptocurrency exchanges are particularly prime targets for heists due to the sheer volume of cryptocurrencies they keep at every point in time and because they appear to be the ‘centralized’ vulnerable point in a ‘decentralized’ blockchain set-up that cannot be compromised.
Blockchain technology, which underpins cryptocurrencies is immutable and as such cannot be compromised; there I no known case of a beach in the distributed ledger. The points of risk are the exchanges where these coins are brought in other to be transferred to other coins or fiat. At this point, coins are stored on the platform and therefore subject to any attack that breaches the platform.
Why Investors should be wary of cryptocurrency exchanges
Cryptocurrency exchanges are subject to security threats which all other websites face. The difference is that they are prime targets for these attacks. Through ransomware, phishing emails and other tricks off hackers’ sleeves, they seek access to these websites to steal cryptocurrencies—no exchange, big or small, is exempted from these onslaughts. This is why the investor must thread (and trade) with caution.
Secondly, since cryptocurrencies are not backed by any physical assets, it becomes difficult, even impossible at times to recover stolen funds. Unlike credit card information that’s protected by insurance, cryptocurrencies not easily insured and investors who have been hacked lack any legal or criminal recourse.
In most instances, investors do not get a refund of their coins once stolen in these attacks. As said earlier, Youbit filed for bankruptcy after it was hacked on two occasions. Mt Gox before it was also forced to go bankrupt after a notorious hack which a then-record $450 million worth of virtual currency was stolen. The attack on Mt Gox, which at the time managed 80 percent of all bitcoin trades, threw the whole cryptocurrency community in 2014 when it happened. The biggest pain you assume was borne by investors who lost their funds.
Coincheck, which unfortunately now holds the record of biggest cryptocurrency heist in history, decided to compensate customers who were affected by the January 26 attack. Indian exchange, Coinsecure also promised to refund victims though that is being delayed. Investors would, however, be naïve to think that they can get refunds in cases of cryptocurrency theft since this is not common.
The importance of Safe Cryptocurrency exchanges
Apart from the Youbit’s hack, several other big cryptocurrency exchanges have suffered cyber-attacks; Mt Gox, Mintpal, Crypsy, Bitfinex, Shapeshift, Coincheck, Coinsecure, you name it. While some of these attacks were bearable, others had devastating effects not just to exchange operators but to the investors who lose their coins in those incidents.
Exchanges, for their good and for the good of their customers (the investors) must, therefore, defend their systems from these tireless cybercriminals who look to take advantage of any loophole in their websites or applications. To attract investors, these platforms must prove themselves to be safe places to trade cryptocurrencies by taking proper precautions and staying a step ahead of hackers.
Keeping your Cryptocurrency Investment Safe
Persons who hold bitcoin or other cryptocurrencies have the first responsibility to keep their investments safe. One way to limit the risk of bitcoin theft is to keep them in cold storage unless one wants to make a trade. Holding coins in ‘centralized’ crypto exchanges will make them vulnerable to any attack on the exchange. It is a good practice to keep only coins which you to trade online (in exchanges) and have the rest offline (in cold storages).
In the choice of exchanges also, investors are better served by trading their coins in exchanges that use cold storages. This is particularly important for traders who hold a substantial amount of cryptocurrencies for daily trades. Here is a guide on how to safely store your bitcoins.