Carnwennan’s promise to deliver secure solutions extends beyond its consulting services. As a security firms we have an obligation to provide educational information to all communities about today's technology and the security behind it. This article will focus on Crypto (Cryptocurrencies) and the community of individuals who want to start trading but really have limited knowledge about the Crypto world. This is a very dangerous world where money and identities can be put at risk if not done properly. The article will focus on introductory concepts that are needed in order to understand how to trade and buy a Cryptocurrency.
Cryptocurrency has been the hottest trading commodity that has hit the market since the housing boom of the early 2000’s. Like the old slogan says, “everyone is doing it.” Crypto has become a must do on any investors radar. Our article today does not look at what cryptocurrency you should buy but more importantly how to protect yourself when buying cryptocurrencies. Much like future contracts and stock options, purchase of cryptocurrencies can be very complex and expensive if not done wisely. As a fellow investor, I felt that our company needed to provide some basic guidance and understanding of Cryptocurrency since many individuals are eager to start trading but have no clue where to begin or how this all works.
What is Cryptocurrency
Cryptocurrency is a digital currency that is used to trade and buy goods; similar to a Dollar or an English Pound. What makes national currency different than Cryptocurrency is the valuation and how it is produced. National Currencies are backed by a government's assets and debt whereas Cryptocurrencies are backed by valuations based on the number of investors that support the coin. In other words, nothing backs a Cryptocurrency other than the amount of money that the currency currently has in its market. Cryptocurrencies use BlockChain technology to secure and manage transactions. Transactions are traded through a digital coin produced by the CryptoCurrency. Unlike traditional National Currencies, these coins can be broken down into fractions of coins. There is no secure domination for coins. For example, I could own 10 cents of a coin which could be reflected as .00001 of a coin. In the article we will refer to Coins as it relates to Cryptocurrencies. To learn more about CryptoCurrencies please visit this Link which does a quick one minute explanation of what a crypto coin is.
These are not Stocks
They feel like stocks act like stocks but are not stocks. Many of my friends make the reference, "they are like stocks right?". Yes you trade, yes there is a market and yes there is an exchange. The buck stops there, stocks are more reliable and have an actual value associated with them. Additionally stocks offer the following:
Stage: IPO's (Stocks) have liquidity, meaning actual assets, employees and working capital which is established. An ICO (CryptoCurrencies) is working towards an unproven concept seeking to raise money.
Regulation: While some ICO's (CryptoCurrencies) have minimal regulations at the exchange level, the actual companies are not governed or operate under any working mandate that enforces how the company behaves based on its investors.
Listing requirements: IPO's (Stocks) must list all exchanges and prove liquidity ICO's do not. In other words ICO's can claim they are worth 10 million but if everyone cashes out and there is only 2 million then investors are short.
Beneficiaries: IPO's offer middleman management that provide services for the consumers. These include the exchange, underwriters, brokers and regulators. ICO's only have private exchanges to deal with
Allocation: IPO's undergo evaluations and other methods to allocate shares for consumer purchases. These shares are guaranteed by banks which insure any shares that are not sold. ICO's are evaluated based on market demand and growth.
Investor Type: IPO's believe in sophisticated investors (Aware of Risks) and go out of their way to insure that investors are educated and vote according to the company's overall mission and strategy. ICO's (coins) are unfettered with no guarantees and allow anyone to perform trades within a Market that has minimal regulation and minimal guarantees.
The first thing to know about Cryptocurrencies and something you have to get into your mind is that crypto currency is unrealized gains. Yes say it again, unrealized gains. The currencies are not acknowledged by any government as official currencies. Some governments have created their own coins and recognize those, but that accounts for less than 1% of the currencies out there. To make it sink in, NO ONE IS OBLIGATED TO PAY YOU for cryptocurrency. Make a note of that because this is one of the biggest risks in the crypto world. You risk having a third party, known as an exchange, trade coins (actual money converted into crypto) and honor the coins value at time of trade. These exchanges also convert the coin from the market value to what is known as Fiat Currency. Fiat Currency is any currency that is recognized by a government and backed by a government as real money. Most of these exchanges deal in major currencies like the Dollar, Pound, Renminbi, Won and many more. The point is to make actual gains you have to be able to find an Exchange that will convert your coins/tokens into actual cash and turn them into real realized gains.
The term Alternative Coin, also referred to as Altcoin, has been blasted throughout the internet, leaving people asking “What does that mean?”. For those that know what an Altcon is skip to the next section. For those of you who don’t know, an Alt Coin is just another type of Cryptocurrency just like a Bitcoin but one that has no mainstream capability to exchange directly into a Fiat currency. Simplifying this, Altcoins have to be exchanged into one of the mainstream coins in order to cash them out into fiat currency. What is a mainstream coin you ask? Bitcoin, Ethereum and Litecoin, Litecoin being one of the newer ones and not supported in all major exchanges, but everyone knows about Bitcoin and Ethereum. Also make note that different Country exchanges may exchange Altcoins into Fiat but those are specific to that region of the world and not accepted world wide.
Cryptocurrency Exchanges (Crypto Exchange) are web based trading stores where individuals can go buy and sell any type of Cryptocurrency. There are two types of exchanges that you need to be aware of: Fiat Exchanges and Altcoin Exchanges. We have discussed Fiat exchanges in previous sections so we will focus more on the Altcoin Exchanges. Altcoin exchanges are comprised of many coins. These exchanges generally offer access to between 50 and 200+ Altcoins, some of which have even more. Altcoin exchanges do not accept fiat currencies. To gain access, you must buy a mainstream coin and transfer those to the Altcoin exchange. In summary: to buy an Altcoin you need to own Bitcoin, Ethereum or Litecoin. Otherwise you can not buy or sell these coins. It is astonishing to know that money can not buy Altcoins only cryptocurrency can buy Altcoins.
Exchanges in general are also known to be very dangerous for individuals. Many of you know about Crypto Wallets. In the mind of most people you buy a coin, put it in your wallet and it's safe. I would highly recommend that method for new users to Cryptocurrency. Exchanges make it very easy for you to keep your money “safely” within their system so you can quickly trade your coin for other coins within the exchange. They manage your wallet on your behalf. What this means is that you never see your wallet, you see an account with your crypto investment in it. This sounds fine right? It really depends on the exchange. Several exchanges have been hacked resulting in losses of millions of dollars. Exchanges can create self imposed market caps, stop trading or even shutdown without ever giving you a single cent. Finding a good exchange is critical to participating cryptocurrency trading. Finding a Trusted Exchange is key to cashing out your cryptocurrency. Those two are not one in the same. When selecting a crypto exchange do your research. CoinMarket.com (https://coinmarket.com) offers great insight into all coins and for each coin it identifies the exchange that the coin can be purchased from. Advice for new investors: if you don’t see the exchange on Coinmarket then don’t use it. Taking it a step further, research the exchanges proposed by Coinmarket. Sometimes exchanges are listed there only because of the scarcity of the coin. This doesn’t mean the exchange is safe to use. Again, Altcoin exchanges do not guarantee your money. You should prepare yourself when using an Altcoin exchange and make sure you understand some basics. Below are some exchange tips that I would advise people follow:
No matter what exchange you use, it is critical to always turn on Two Factor authentication. This can be used typically with the Google Authenticator app available for both iPhone and Android. Two factor authentication will minimize the risk of anyone gaining access to your account.
Registration is the process that verifies you and allows you to trade in high volumes. I make it a rule not to register on every exchange. Registration is very intrusive. Some require bank verification, others require Legal documents (Passport or License) and even stricter exchanges require both of these sets of records as well as validation by a third party. Again exchanges are dangerous, especially when they have no type of regulation that protects your privacy. I would recommend registering on exchanges that are trusted which means they are in alignment with Federal Standard and Regulations. If not trusted then look for exchanges with bank partnerships and I mean major banks. No bank wants to be a partner to a system that is prone to being hijacked.
Every trade you do has a transaction fee, ta-da! Many individuals don’t realize but exchanges emulate the stock market exchange. Blockchain transactions cost money, fractions of cents or in Bitcoins case 10’s and 20’s of dollars. Understand that when you are trading Altcoins you will have fees that you pay for transaction. Typically this applies to conversion between two coins or moving your money from either an exchange or to a Wallet.
Trusted Exchange versus Non Trusted
Earlier in the article we mentioned use Trusted Exchanges for cashing out fiat currency. To clarify, we mean specifically that these aren’t necessarily Trusted exchanges but rather Regulated Depositories. Regulated Depositories secure your fiat currency such as USD with FDIC insurance. This offers no protection for your cryptocurrency balance. Trusted exchanges are important for our average investor and more important for our big investors. The biggest problem that Bitcoin had when it hit its all time high of 19K was that all exchanges, Trusted and Non Trusted had put a market cap on how much people could cash out. As mentioned before they can block trading blocks or put self imposed trading limits to control how much money their exchange will pay out. The difference between trusted Exchanges and non trusted are the guarantees that you get. There are even differences between trusted exchanges, comparing the most popular fiat exchanges in the U.S: Coinbase, Gemini or Kraken. Kraken and Gemini are both insured and have regulations against their depositories which make them ideal for large withdraws that don’t exceed $250,000 USD. Coinbase limits withdrawals based on verification, number of trading actions and trading history. In some cases depending on the market it will put trade ceilings and block transactions. It does this since it has minimal regulations that allow it to transmit money but not necessarily guarantee its money since it has no obligation or regulation which governs it. While its legal and seldom has problems it still holds final judgement on how your money is managed and how quickly you can cash out. Gemini and Kraken have actually undergone through full FCC regulation, where Gemini is the only FDIC insured exchange and will guarantee up to 250,000 of Deposited fiat currency. As you can see no one exchange is created equal and each exchange whether its Trusted or not have their own risks associated with the way they do business.
Your Cryptocurrency investment is not backed or protected in any way. This is important since Exchange hackings are becoming more common and insuring your money becomes more complex to do. Recently exchanges have become high profile targets and it is import for individuals with long term investment goals to leverage their Crypto wallets versus letting their money sit within an exchange. For those doing day trading ensure you have tested and verified your exchange has no minimum withdraw limits or ceilings that could prevent you from moving it out when you need it.
Crypto currency is not just a U.S thing. Every major continent and country have their own cryptocurrency. I mentioned previously that there are different fiat currency exchanges and this applies across the different Crypto markets. There are even private markets that banks and consortiums have for members which allow them to trade internally with their own coins. Be very careful when trading in foreign markets because their exchanges may have rules and regulations that prevent foreign trading which could lead to substantial loss in money. Research coins and their markets, try to understand how you can trade in and trade out of those markets.
Trade, Trade and Trade
Do not sit on a coin that is tanking, chances are the coin will not recover. When a Altcoin heads south trade it out to another coin ASAP. In Cryptocurrency trading, you can lose big but obtain even bigger gains. I can’t tell you how many times an Altcoin has gone south on me and I have moved it into another coin, one hour goes by and I recover my loss. Worst case situation, dump the Altcoin and buy Bitcoin or Ethereum and you will realize at least 10 to 15% gains on a coin that is tanking. All that said I don’t guarantee these percentages everytime. I can only admit that this has worked for me and i have provided this advice to others and it has been successful for them but in no way do I guarantee this for everyone.
Security Tips in buying an AltCoin
First let me add a disclaimer, I am not a financial advisor or broker that is legally certified to provide financial advice. I am no expert and solely base my advise based on personal opinion and experience. I have been experimenting (trading) across different exchanges and markets world wide and looking for areas that the average person can fall prey to malicious and deceptive tactics that could cost you a lot of money.
Always ensure that you are leveraging a secure connection when connecting to an exchange. HTTPS is important when leveraging an exchange, using websites that do not have HTTPS will result in lost or stolen passwords and information. To learn more of HTTPS visit this helpful link.
Beware of Unrealistic Claims
Crypto promises a daily or monthly rate of returns which draw people into investing. Practically speaking it is close to impossible to generate consistently fixed profits without doing an extensive amount of day trading and even then nothing is guaranteed. Anything that offers fixed returns requires extensive investments that guarantee profits and to do this typically individuals fall prey to Ponzi schemes. Ponzi's are fraudulent scams that generate returns for old investors using investments from later investments, without any legitimate operations. Look for the following signs when it relates to these types of scams:
- Guarantees of high profit/interest rates
- Referral/affiliate schemes
- Ambiguous details on how it actually works
- Minimal to no information on founding team or company
- Difficulty in withdrawal of funds
Age of the Altcoin
The age of the coin matters, yes, many can argue that its irrelevant but for you and I its a significant factor. Sure we might miss out on the huge surge but you want to make sure a coin has an established Market cap. Don’t buy brand new coins less than 3 months old. Those coins are extremely high risk and have no guarantee to hold its value. One of the most common tactics for scam artist is to dump a million dollars into an Altcoin. The coin is so new that the market cap shoots up and millions of investors jump on the coin and dump thousands of dollars into the coin. As soon scam artist sees his value go up 10 to 15% they pull out their money and crash the coin. At that point your investment tanks and the coin doesn’t recover causing you to potentially lose thousands of dollars. That said, not all new coins are bad but until your comfortable trading and come up with your own risk assessment to valuate coins, avoid new ones that may cause you financial loss.
Code Base is Critical
Ensure that the Altcoin has an established code base that is leveraging some sort of Blockchain technology that can be researched and reviewed. Lack of this type of information should raise flags when purchasing a coin. Look for white papers or partners in the technology field that have a proven record with the tech.
Website is Critical
Having a website does not mean the coin is legit. Anyone can build a website but what does the website mean? Does it tell you what the coin does or how it works or does it leaving you asking what is this? Websites for coins should be informative and concrete explaining the mission of the coin. The website should also reflect potential partners or Investors that are backing the coin. Yes, that is important, if the coin has no backing then what are you buying? We are talking about money so the people behind the coin should have some sort of substance and a business plan with clear purpose and backers. Read the website and understand the coin. If it has no website flag it and research it, if you can’t read the website because it's in a foreign language translate it or have someone translate it for you. Do not buy blindly it will end up costing you a fortune.
This is the biggest mistake that people make with Altcoins. Coin Wallets are private. DO NOT USE Beta, Development, or Third party Wallets for the coin. This should be a simple notion: the wallet has your money in it. Wallets that are not fully developed are not ready to store your cash. Using such a wallet is like relying on a safe with an untested lock. Leverage the recommended Wallets that the vendor of the coin endorses. If they have no online Wallet then use a local wallet otherwise stick to the exchange if you are not comfortable setting up a local Wallet. At least you have some basic security within the exchange that can store your coins where you can get to them.
If a coin is not traded on a common exchange then be worried. Go to Coinmarket.com and search for the best exchange related to the coin. Once you find the exchange then make sure to research it if its unknown to you. This can be as simple as Googling the exchange along with the word “reviews”, (eg. “Binance Reviews”) this will provide you with so much information about what you are about to walk into. If no results come back then be worried. Everyone complains about an exchange and at least some users will review an exchange. With the sheer number of available of AltCoin exchanges, you are bound to find a review. Any exchange with no reviews is certainly suspect.
Backup your Wallet
Look there are many ways to to do this both correctly and incorrectly, but you have likely already heard the horror stories. Millions of dollars are lost because people lose their keys. I use an online program that encrypts my key with AES 512 encryption and I use Multifactor to get into my online keeper. I am still nervous, but it's better than writing it down or putting it in plain text in the cloud. Keep your passphrase and pins somewhere secure. I personally don’t trust USB sticks that can walk away or eventually crash. I know too many people that run into that problem. Use Keepass or some sort of password keeper that encrypts your information. If that doesn’t work for you my last resort to ensure you have your digital information backed up is to leverage a text file where your passphrase is stored. Once you have saved the file Zip encrypt the file with Winzip or WinRAR, put a password on the encrypted file that you and only you will know and drop it into a online Drive space (Google, Dropbox, One Drive, etc..). Make sure you use at least AES 256 when possible and make sure the password is nothing less than 12 characters. This method while not the most secure is the closest thing you have to a online backup that is secure for your wallet if no other option is available to you. Now as you progress you can start using local wallets and other methods like myself to store you encrypted keys but for you folks just getting started this is probably one of the safest and easiest ways to save your wallet information and not lose it.
Keys are Private
Simple DO NOT SHARE YOUR KEYS. Don't send them over email, don't disclose them to someone over the phone, don't share them on paper, pretty much keep them to yourself. Your wallet passphrase (key) is private, there is absolutely no reason why anyone needs that key. Its yours, buck stops there.
Buy Ethereum or Litecoin for Trading
Don’t buy Bitcoin for trading Altcoins. I say that because you will encounter excessive transaction fees. Buy Ethereum or Litecoin when possible to do all your purchases for Altcoins, the transaction fees are substantially less. Make it easier on yourself as you experiment and make trades.
We covered extensive amounts of information and hope that the information provided can help guide many of you down the right path when dealing with Cryptocurrencies. In closing we have put together a list of exchanges which we feel are some of the better fiat and Altcoin exchanges out there. Please protect your privacy at all times.
Fiat Markets to Buy Currencies from
Recommended Alternative Coin Exchanges