Five million bitcoins.

That’s how many have been lost or stolen since bitcoin was created. 

Unless you take the right precautions, cryptocurrency theft and hacking is still a very real threat. 

And then there’s the risk of losing your cryptocurrency by failing to back it up. (Just ask the man who threw away a hard-drive with $75 million of bitcoin on it).

Luckily, there’s plenty you can do to protect yourself. In this article, we’ll go over eight best-practices you should follow when using cryptocurrency.

Stay safe.

1. Don’t Tell People How Much Cryptocurrency You Own

Or better yet, don’t tell anyone that you own cryptocurrency at all. If pressed about this, a good answer is that you own “some” or any other non-answer.

The reasoning behind this is pretty simple. Telling people how much cryptocurrency you own is a great way to turn you into a target, even to people you trust. There’s a reason one of the first things lottery winners are always told is to contact a lawyer before telling those around them. 

bitcoin best practices

Unfortunately, money makes some people greedy, and those people will stop at nothing to get what they want.

Unlike a bank account or other fiat cash storage, cryptocurrency is almost always stored close to you (on a computer or hard-drive in your home). It can be stolen relatively easily. And while your password may be strong, rubber-hose cryptanalysis or social engineering means that a strong password may not be enough when thieves are in close proximity to you.

2. Cold Wallets Are an Awesome Idea

Keeping all your currency in a hot wallet is asking for trouble. A hot wallet (one connected to the internet) is great for day-to-day transactions, but they are easier to steal from. A “cold wallet” means storing your crypto offline. Keeping most of your cryptocurrency safe in cold storage is just plain good practice.

Read more: What is cold storage for cryptocurrency?

Additionally, for an extra step of protection, you can use a hardware wallet. Hardware wallets are like an external hard-drive but designed specifically to store cryptocurrency. 

ledger nano cold storage bitcoin wallet plugged into a laptop
Pictured: a Ledger Nano hardware wallet

Most hardware wallets are tamper resistant. Meaning they will erase themselves if someone tries to break into them, either physically or by attempting many passwords. This is much better than a laptop or other general-purpose device because if the laptop is stolen, any wallets on there can be attacked forever.

The most popular cold storage hardware wallets are Ledger and Trezor. 

3. Never Use Exchange Wallets for Longer Than You Need To

In other words, don’t keep your bitcoin on Coinbase, Bitpanda, Binance, or any other exchange.

This one doesn’t make sense on the surface. Why wouldn’t you want all your currency ready to trade at a moment’s notice?

First off, online wallets, in general, are dangerous. You are not the only person with access to your funds. In fact, you don’t even have total control over the wallet. Not having full control over your wallet is a pretty glaring security issue, and should be avoided if possible.

Secondly, cryptocurrency exchanges can fail incredibly quickly. There is no fallback for crypto exchanges other than the ones they make. If the exchange fails, you may never get your cryptocurrency back. Your money may have even been used without your knowledge in an attempt to prop up the failing exchange.

And lastly, due to their extremely large turnover, exchanges are a much bigger target for hackers and other malicious people than a single wallet.

4. Always Encrypt Your Wallets

Now that your crypto is safely in a private wallet, your next challenge is keeping your wallet secure should the files themselves be stolen by someone across the internet.

The first line of defense for the wallet is a strong password. As with most passwords, length trumps complexity, and the combination of both is best.

how to make strong passwords
Credit: 360 Total Security

That said, if you believe your wallet has been compromised, move all the cryptocurrency from the compromised addresses to new (hopefully secure) addresses. The fees you will pay to move them to the new address is worth the peace of mind. 

Some wallets have one-click options to do this, often referred to as “sweeping”.

5. Use Separate Addresses Where Possible

Staying private in the cryptocurrency world is, in general, a good idea. Bitcoin has a reputation for being anonymous, but that’s not actually true.

When you transact with someone, they can see your “public address.” It looks something like this:

1GsOmhLr0FbBpNco1NDar6sSV8tsHaKF6kd.

It doesn’t tell anyone your name, but if they search for this address (on a block explorer), they’ll see every transaction you’ve ever made using that address.

It means you’re effectively sharing your transaction history with someone else. You’re also showing that person who else you have transacted with and how much was transferred. That last one falls under the first rule we have, as sharing how much cryptocurrency you have makes you a target.

When transacting with non-private cryptocurrencies like bitcoin or litecoin, be sure to use separate addresses for each transaction.

An alternative is using a truly anonymous cryptocurrency like monero.

6. Double Check Everything

One easy way to lose currency is to send it to the wrong place or to use the wrong wallet. 

Cryptocurrency transactions are “immutable” – they can’t be reversed. So if you send money to the wrong wallet, it’s gone forever.

For this reason, you should always verify that you know what you’re doing, and everything is correct.

For addresses, this is pretty simple. Check that the first few and last few characters are the same as your intended target. If the first and last characters are correct the rest probably are. 

Though, there is some malware out there that will switch out addresses for lookalikes in your clipboard. For this reason, you may want to verify that the entire address is correct before sending large amounts. 

If you’re still worried, try sending a test transaction first.

7. Always Make Backups (Use the 3-2-1 Rule)

Keeping backups of everything is a good idea in general, but it’s an especially good idea when it comes to cryptocurrency.

For most use-cases, the 3-2-1 rule for backups should be followed; three copies, two different media, one off-site. 

321-Backup
Credit: ISG Tech

That could mean keeping your private keys on:

  1. Hardware wallet.
  2. CD or flash drive.
  3. Paper wallet.

That’s three versions stored on at least two different devices or media.

Next, you should keep one off-site. In other words, nowhere near the other two. 

A nice off-site location is a safety deposit box at a bank. Either hardware or paper wallets are good here, though paper wallets are (in this case) the safer bet. Note that this requires you to trust that the bank will not open your box for any reason.

For large amounts of cryptocurrency, you can even utilize a former military bunker in the Swiss Alps.

The two separate media means that if one is damaged in some way, the other is likely not. And one off-site means that in the event of a house fire or otherwise, you still have a backup.

Remember that you should always encrypt your backups. If you back up a wallet file and someone malicious gets a hold of it, your currency is theirs to steal.

8. Never Spend Money You Can’t Afford to Lose

Finally, cryptocurrencies are incredibly volatile. This means the price can swing up very high, and fall very low. 40% swings of value in a single day are not unheard of, especially for smaller coins.

Much like with regular investments, storing value in cryptocurrencies is a calculated risk, and, there is always the chance that cryptocurrencies “go to zero”. And if you’ve put in every cent you have, you could end up in trouble.

Conclusion

The best-practices outlined here require a little extra work, but it’s well worth the effort. Keeping your crypto safe and secure is the most important thing you’ll do.

bitcoin price rise

The price of bitcoin spiked more than 10% on Monday morning. Ethereum, XRP and bitcoin cash also exploded to double-digit gains before settling later in the day.

Bitcoin Price Teases $7,000

According to CoinMarketCap, bitcoin’s price spike hit $6,965 before dropping back to $6,660. However, Bitfinex – a cryptocurrency exchange in Hong Kong – charted bitcoin at $7,788 at its highest point.

So, what accounted for this rapid price rise?

Huge Sell-off in Tether

Bitcoin’s surge was triggered by traders selling tether – a “stablecoin” which is pegged to the US dollar.

Tether is typically used to trade cryptocurrencies against the dollar without having to use fiat currency itself. Tether is also used to keep money “on the sidelines” before entering a particular trade. Since it’s pegged to the US dollar, it is a relatively stable asset.

A reported 20% of all crypto trades are made using tether.

What Caused the Tether Sell-off?

According to Bloomberg, the implosion appears to have been caused by renewed rumors of insolvency at crypto exchange Bitfinex. Bitfinex has been plagued by speculation over its financial health and banking relationships.

That’s a problem for tether because Bitfinex and tether share a CEO.

The nerves about Bitfinex’s financial health appear to have spilled over into concerns over tether.

In an attempt to downplay concerns, Bitfinex was quick to point out that “all cryptocurrency and fiat withdrawals are, and have been, processing as usual without the slightest interference.”

FALSE RUMOR: Binance is Delisting Tether

One rumor circulating Twitter on Monday morning hinted that Binance – the world’s largest crypto-to-crypto exchange – was set to delist tether. It was fueled by an image that reportedly showed an email from Binance announcing the forthcoming delisting.

Binance CEO, however, confirmed it was a faked Photoshop image. While this may have initially caused a panic sell-off in tether, it should have no further impact on the price.

For now, the price of bitcoin has dropped from its spike to a stable $6,640.

China destroy bitcoin

Welcome to the weekend, folks. Grab a coffee and let’s recap the biggest news stories of the week in cryptocurrency and blockchain.

China Has “Capability” and “Motive” to Destroy Bitcoin, According to Report

A new report this week claims China could destroy Bitcoin. The report, authored by researchers at Princeton University and Florida International University outlines 19 different ways China could attack the Bitcoin network.

Is it based in truth?

Theoretically, yes. The report points to the fact that 74% of Bitcoin mining hash power comes from China. And five of the six largest Bitcoin mining pools are located in the country.

bitcoin mining pools

If those mining pools collectively orchestrated a 51% attack, they would control the network, and bring it down if they wish.

However, it’s important to point out that the Chinese government doesn’t own these mining pools. And the mining pools themselves have little incentive to execute a 51% attack (it would kill the value of bitcoin, making their efforts worthless).

What is concerning is the level of Bitcoin centralization in China.

The report goes on to explain how China’s “Great Firewall” appears to give Chinese miners an advantage. It slows down miners outside China and incentivizes those within the firewall to generate “empty blocks” (the blocks contain no transactions, but the miner receives a bitcoin reward anyway).

This, coupled with cheap electricity in China, is centralizing mining power in one country. And that’s a problem.

Note: the report in question has not yet been peer-reviewed.

Venezuela Is Forcing Citizens to Use Its Controversial Cryptocurrency to Buy Passports

As Venezuela’s fiat currency, the bolivar, soars towards 1,000,000% inflation, the government is putting its faith in a state cryptocurrency, petro.

Venezuela petro cryptocurrency

The petro was created by the Venezuelan government and its value is backed by the country’s oil price to keep it stable. Citizens are now required to pay for passports and renewals using only the petro cryptocurrency.

But the petro isn’t without controversy. Its creators have been accused of ripping off the Dash whitepaper. The US government has also accused Venezuela of using the petro to defraud investors, and critics say the petro pre-sale didn’t generate nearly as much as the Venezuelan government claims.

Cryptocurrencies Pose No Risk to Global Financial Stability

In somewhat brighter news, a report this week concluded that cryptocurrencies are not a risk to the global financial system.

The report carries some weight. It was released by the Financial Stability Board and is backed by the Bank for International Settlements, the world’s oldest financial institution.

However, it does go on to say there may be a tipping point in the future.

If they continue to grow, the report claims, cryptocurrencies may one day pose a threat to the reputation of current banks and financial systems. There may be a risk of exposure if traditional banks adopt crypto on a wider scale.

And there may be risky consequences if bitcoin or other cryptocurrencies become a common payment method.

Price News

The cryptocurrency market suffered an epic $16 billion wipeout on Thursday. It took place in just a few hours, dragging bitcoin down 4%.

bitcoin price
Chart: Coinmarketcap.com

As usual, altcoins bore the worst of the fall. Ethereum, XRP, and others fell in the region of 10%.

That’s all for this week. We’ll be back bright and early on Monday.

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Wall Street - Bitcoin hedge funds

Crypto hedge funds are launching at a record rate in 2018, despite the ongoing downtrend in the market.

20% of all hedge funds launched in 2018 are crypto-related, according to new research from Crypto Fund Research. It’s a sign that “big money” and institutional investors haven’t been put off by the year’s selling pressure.

90 Cryptocurrency Hedge Funds Launched in 2018

90 new crypto hedge funds have appeared this year, and that number is expected to rise to 120 before the end of December.

Compare that to 2016 when  just 3% of all new hedge funds were crypto-related.

Approximately half the new crypto hedge funds are based in the US, while others have popped up in the UK, Netherlands, Switzerland, China, Australia, and the “Blockchain Island,” Malta.

Rapid growth aside, however, let’s put things in perspective. The total number of crypto hedge funds still account for just 3% of all hedge funds. In terms of market capitalization, crypto funds manage $4 billion compared to the global hedge fund total of $3 trillion.

What’s a Cryptocurrency Hedge Fund?

A crypto hedge fund invests predominantly in crypto assets like bitcoin and ethereum. They may also invest in ICOs (initial coin offerings – a form of crowdfunding capital in the crypto space).

They differ to crypto venture capital funds and private equity funds which invest directly in blockchain projects and crypto startups.

When you invest in a cryptocurrency hedge fund, your money is pooled with others and the returns are shared. Bear in mind, however, that participating in a hedge fund usually involved high minimum deposits.

Undeterred by Low Prices

The rapid growth of hedge funds in a year when bitcoin has dropped almost 70% is curious. Traditionally, hedge funds sprout up during boom markets to capitalize on an uptrend.

Founder of Crypto Fund Research Joshua Gnaizda said:

“These seemingly unfavorable market conditions have not deterred managers from launching new crypto hedge funds at a record pace. While we don’t believe the rate of new launches is sustainable longer-term, there are currently few signs of a significant slowdown.”

Profit From Volatility

While the market conditions might appear unfavorable, a number of crypto hedge funds still make money when prices are down. Hedge funds can profit from volatility, which is why one crypto hedge fund, Amber AI Group, was able to make a 30% profit in the first quarter of 2018, when crypto prices slumped.

Hedge funds are notorious for short-selling, or profiting from an asset’s decline. By doing this, they can “hedge” their losses and, in some cases, make a profit when the whole markets moves downwards.

Wall Street Embraces Bitcoin

The rise of crypto hedge funds is yet another sign that Wall Street is edging closer to broader cryptocurrency adoption.

With the launch of a bitcoin futures market in 2017, rapid hedge fund growth, and an exchange-traded fund (ETF) on the horizon, the “big money” is coming.

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bitcoin mining profitability

Bitcoin mining has become drastically less profitable this year, despite soaring revenues. What’s behind this dip in profitability? Block Explorer editor Ben Brown explores.

New research from Diar reveals that Bitcoin mining has generated record revenues of almost $5 billion so far this year. That’s already higher than 2017 with three months to go.

However, that revenue hasn’t translated into profit.

High energy costs and increased competition in the space means the average bitcoin miner is struggling to make a profit.

In fact, September marked the first month when bitcoin mining became unprofitable for anyone paying retail prices for electricity.

Worryingly, this means bitcoin mining will increasingly be dominated by the “deep pockets” of mining corporations like Bitmain.

bitcoin mining profits infographic
Credit: Genesis Mining

Mining a Bitcoin Costs More Than Buying One

According to further data by Fundstrat, it currently costs $7,300 to mine one bitcoin.

Yet, we can go to Coinbase and buy one bitcoin for less than that – $6,600 at the time of writing.

To come up with its $7,300 figure, Fundstrat takes into account a $4,000 energy fee (at $0.06 kW/h) and $3,300 for equipment, wear-and-tear and other overheads.

So what makes bitcoin mining currently so unprofitable?

More Mining Competition Than Ever

Despite the bitcoin bear market, mining activity is stronger than ever. Bitcoin’s hash power has doubled since May, which means more and more miners are competing to generate Bitcoin blocks.

Hash rate explained: In order to generate a bitcoin block, miners compete to solve mathematical puzzles. The first to solve the puzzle with computational power generates the block and receives the bitcoin reward. The total number of attempts to solve the puzzle per second is called hash rate. The more miners working to solve the puzzle, the higher the hash rate.

The hash rate hit a record high in August. In other words, there are more miners working to generate bitcoin blocks than ever before.

bitcoin hash rate chart
Chart from: Blockchain.com

More competition means each miner requires more energy and computer power to generate a bitcoin block.

Energy Rates are Choking Mining Profits

Because miners need more and more energy to compete, electricity prices are choking their profits.

Diar estimates that anyone paying a retail energy price of $0.10 kW/h can no longer make a profit on bitcoin mining.

Add that to overhead costs such as equipment, rent, and salaries, and you begin to see why profits are declining.

It’s no surprise that 81% of bitcoin’s hashing power originates in China. That’s because energy rates are relatively lower – an average of $0.08 kW/h at retail price.

Bitcoin Mining: Dominated by “Deep Pockets”

Energy prices are even lower when bought at wholesale prices, which only large mining pools can afford to do.

In other words, the dominance in bitcoin mining will shift more and more towards big companies like Bitmain. Bitmain owns two of the largest bitcoin mining pools and commands up to 75% of the world market for mining equipment.

As you can see in the chart, bitcoin mining is already dominated by a small number of pools (Bitmain owns BTC.com and Antpool. At one point in June, Bitmain edged close to 51% of bitcoin hashrate).

bitcoin mining pools chart
Chart from: Coin.dance

With bitcoin prices in a bear market, hash rates at a record high, and fierce competition, miners are increasingly incentivized to join larger mining pools.

And here’s where it interesting. The vast majority of Bitmain’s revenue comes from selling mining equipment (95%). So it’s in Bitmain’s interest to keep bitcoin mining profitable for its miners, wherever they are in the world.

Since Bitmain can purchase cheap energy wholesale in China, where it owns 11 giant mining facilities, it can offset the more expensive mining costs in, say, the US. Bitmain can therefore lure miners to a larger pool by offering more security.

Big Companies Can Afford to Take a Short-Term Hit

The profitability issue is also linked to the fact that bitcoin is at a significantly lower price today than it was in January, offering a lower return. Companies like Bitmain can afford to play the long game, betting on higher profitability when the crypto market turns around.

By that point, Bitmain will have swallowed up more miners and increased its market share.

This all means that power, dominance, and control over bitcoin mining will shift yet further to just small group of mining pools.

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