By Chris Sedgwick, director of security operations at Talion
Cryptocurrencies are a topic that touches many areas; not only finance and investing but technology and even political arenas. Although apolitical in itself, it is the structure behind these cryptocurrencies that make them a much talked about subject amongst political purists from across the political spectrum. This structure can be boiled down to the following; think of cryptocurrencies as a ‘big spreadsheet’, and when you ‘mine’ crypto you essentially fill in the spreadsheet, keeping the ledger up to date on who is transferring currency to another party.
It is perhaps this decentralised nature which has contributed to the meteoric rise of cryptocurrency value. Modern investors see the value in having an immutable ledger, meaning that external users or third-parties cannot tamper with previous transactions. This becomes more crucial when you consider the impact that quantitative easing has had on the economy over the past several decades. Cryptocurrencies, compared to their physical counterparts, are practically immune from quantitative easing as there is a predetermined number of coins in circulation at one time meaning that they are impervious to inflation. This has contributed to more individuals over the years turning to cryptocurrencies as a ‘safe-haven asset’ in the same way that investors would traditionally turn to gold. In my eyes, I see Bitcoin as better at being Gold than Gold itself, because of its ability to be infinitely divisible into micro units and decimal points of a Bitcoin rather than a single gold coin. It also inherits another important characteristic of Gold which has fuelled its rise in price, it is finite – there will only ever be 21 million of them in circulation (once all mined). Compare this to standard modern currency, on money printing and inflation consider this: a fifth of all US Dollars were created in 2020, and now in 2021 President Biden is considering a $1.9 Trillion stimulus plan. Indeed, it is this effort by central banks across the globe to print their way out of a pandemic/unstable economy that – in my opinion – has led to the exponential price increase in Bitcoin during 2020 rather than any other factor. As long as this continues (which it almost certainly will), faith in fiat currency will wane and interest in “unprintable” cryptocurrencies will only increase.
Are Cryptocurrencies a Bubble or a ‘Safe-haven’?
One key difference between cryptocurrencies and traditional safe-haven assets is that the former has not yet been subjected to a full recession. Even the 2008 financial crisis was imbued with substantial safety nets for many of the organisations that needed to be bailed out. Perhaps this is what contributed to the rise of cryptocurrency and a rejection of centralised or government owned banks.
As a cultural movement, cryptocurrencies represent a seismic cultural shift to a new form of radically decentralised currency, not controlled by ‘third-parties’ such as banks, governments, or hedge fund directors that use the stock market as a playground. One can compare the influence that cryptocurrencies have had on the current zeitgeist to the invention of the Internet or rail travel. Whenever there is a new technology, we see these ‘manias’ pop up as stakeholders race to cash in on the latest gold-rush. A key point here is that cryptocurrencies are not only a new technological innovation, but a technological monetary innovation, making it much easier for people to “buy in” to it when compared to previous less publicly accessible innovations. While it is important to note that with any gold-rush there will be winners and losers, all indications point to the notion that the traction this movement has gained recently indicates that it will not be a bubble, and as more and more big companies start making moves towards accepting cryptocurrencies the ‘network effect’ will really hit, and the price will respond accordingly such is the nature of pure supply/demand economics immune from the money printing.
Cybersecurity Concerns of Cryptocurrencies
The biggest security threat facing cryptocurrency investors is generally user facing and avoidable. The vast majority of the time, the proper security steps have not been taken when storing cryptocurrencies in coin wallets. Storing currency on an online exchange means that the security of your cryptos entirely in the hands of the website owner. One need look no further than the example of Mt. Gox, an online Bitcoin wallet based in Japan. In 2014 the wallet lost about 850,000 Bitcoin belonging to thousands of customers.
The best way to avoid this kind of financial fiasco is to store assets away from online connections in an offline “cold storage” wallet . This keeps your assets much safer as physical access to the device would be required to grant access to private keys needed to facilitate transactions. If you are using an online service for this purpose, then you must ensure that it is secured by at least two factor authentication (2FA). This will help reduce cybercriminal activity by limiting access in the event of breached credentials. Remember, if you don’t use an offline cold storage unit then you are putting your assets, and faith, in the hands of the website owners to maintain the security of their website. If you fail to secure your investments with a minimum of 2FA then you run the risk of unauthorised access to your wallet in only a matter of clicks. At this point it is also worth considering that acquiring a cold storage wallet is not entirely risk free in itself. A few months ago, cryptocurrency wallet manufacturer Ledger announced that it had suffered a breach via its website and leaked thousands of users’ data. Whilst the information itself didn’t contain passwords, it included details such as physical addresses, phone numbers and emails. Despite the victims in the breach being security conscious and buying such a device, their address (and most likely the physical location of a cryptocurrency wallet with potentially a large amount stored on it!) has now been compromised, and there are many horror stories of individuals being threatened with physical violence and home invasions if they do not relinquish their assets.
In the final three months of 2020, crypto-mining malware surged by 53% as sources correlate the increasing value of Bitcoin with the increased volume of crypto mining malware attacks. There is a very common confusion that a rise in coin-mining malware is intrinsically correlated to the price of Bitcoin. Coin mining malware will be mining Monero, not Bitcoin, and will require relatively light amount of processing power in comparison. To mine Bitcoin, you ideally need some real estate in the arctic circle and a mining rig linked to He-Man on a treadmill, rather than just infecting someone’s laptop with malware and utilising their GPU. Coins such as Monero are favoured over other smaller “alt-coins” amongst individuals looking to use their gains for illegal use as there is no tracking of transactions and the Blockchain is not transparent. However, the rising concern of this malware should make any cryptocurrency investor think double check their security controls.
While there are regulatory controls around cryptocurrencies, they mostly encompass the financial earnings that must be reported through HMRC and official channels. Governments do have some control over the onboarding of crypto currencies, as most trading services require you to submit proof of identification with passport and phone numbers. While, as previously stated, all cryptocurrency transactions are tracked, they include no personally identifiable details, maintaining autonomy and anonymity.
One might suggest that the user-generated, decentralised notion of cryptocurrencies inherently rejects the concept of regulatory authority. Indeed, for any individual or collective to take control of Bitcoin, they would need at least 50% of all coins in circulation in what is handily dubbed a “majority attack” or “51% attack”. This would allow them to corrupt the blockchain and control the overall value. However, to do so would require them to take control of more than half of the current mining power of Bitcoin, which is completely unfeasible.
Even now, cryptocurrencies are becoming more commonplace in day-to-day transactions. Homeowners are accepting cryptocurrency payments on Rightmove, minimising the need for third-party involvement such as banks or mortgage approvals. Even ‘hipster hospitality’ is accepting crypto as a form of tender to buy the most expensive mac and cheese that Camden Market has to offer. Back in 2016 I remember paying for a £3.00 Tesco meal deal with Bitcoin. If I had held on to this, it would now have the value of around £200! While the market value of cryptocurrencies is subject to fluctuate, the increasing desire for a decentralised, international form of legal tender will only increase. As more investors turn to cryptocurrencies it is essential that they not only know how and why to invest, but perhaps more importantly, users must know how to secure their investments. As crypto-mining software rises, and the number of cryptocurrencies on the market increases, we will certainly be seeing more unfortunate headlines about stolen assets, house invasions, hard drives mistakenly buried in landfill sites and overpriced meal deals.