The crypto space is filled with technical jargon which can make things extremely confusing at times. To make matters worse, the word “cryptocurrency” may not even be the best way to define what we know as cryptocurrencies in the first place. What is a cryptocurrency? A cryptocurrency is a digital asset which is secured cryptographically. They are generally built with the goal to be decentralized, secure, and fast. While the first crypto, Bitcoin, was designed to act as a currency in the way that money does, today we are seeing many projects which have different goals.
Coins versus Tokens
We can separate cryptocurrencies into two different categories, coins and tokens. Many people define coins as cryptos which maintain their own network. Examples of these are Bitcoin and Ethereum. Both of these cryptos have miners (or stakers in the future), which confirm transactions in exchange for economic incentive. These cryptos were built from the ground up, so to speak.
On the other hand, cryptos that are hosted on another coins network are sometimes called tokens. An example of a token is Kyber Networks, KNC. When Kyber decided to start their project, they choose to develop their platform on top of Ethereum’s network instead of creating a new network from scratch. Kyber followed a list of standards created by Ethereum called ERC-20 which made it easy for Kyber to create their own ecosystem while leveraging Ethereum’s network.
Currency versus Platform Cryptos
Another distinction that is often made is between currency cryptos and platform cryptos. Currency cryptos are coins or tokens such as Bitcoin, Litecoin, and Monero. These are designed to be used as a medium of value transfer primarily. It is hard to put a value on them but defining factors include: their usefulness, mining costs, and ultimately what someone is willing to pay for them. If one currency crypto is better than another currency crypto, it will be in higher demand and the price will be driven up.
Platform cryptos are slightly different. While they also have value and their value can be transferred from one wallet to another, their primary focus isn’t to be a currency. The primary focus of a platform crypto is to power a network. Ether is used in order to fuel Ethereum’s network for example. Ethereum.org describes ether as the fuel “whose purpose is to pay for computation”. Other examples of projects that utilize platform (also sometimes called utility) cryptos are: Neo, Icon, and Kyber Network.
Some of the vocabulary in this space may seem counter intuitive, such as calling all cryptos, cryptocurrencies. Making the distinctions between coins & tokens as well as platform cryptos & currency cryptos, provides a more clear perspective on the range of projects that are out there.
Do like the Winklevoss Twins: Learn How to Keep your Cryptocurrency Assets Safe.
The Winklevoss twins are pioneers in the modern day bitcoin space. They not only started their own bitcoin exchange, but they were also instrumental in creating the public adoption of the title of gold 2.0 for bitcoin. They also were worth an estimated 1.3 billion dollars in bitcoin as of December 2017, giving them the title of bitcoin billionaires. Having such a large fortune in digital asset begs the question, how do the Winklevoss twins keep this safe from most conceivable negative eventualities.
Cold storage is the answer to this question. They use an ingenious system that is more complex than simply writing down their private key on a piece of paper for safe-keeping. Their system, according to Investopedia, is as follows:
“To protect their bitcoin holdings, the brothers distributed snippets of a printout of their private keys across multiple safe deposits around the United States.”
This division of responsibility, of dividing their private keys up amongst multiple parties, makes it increasingly difficult to have a breakdown in their system because many collaborators, in this case not just multiple people but multiple banks, would have to get together in order to perpetrate theft.
Whether or not you have a large fortune in cryptocurrency, there is still due diligence that can be done to keep even your smaller investments, or fractional coins that remain on exchanges, as safe as possible. Whether or not you have a system of cold storage set in stone, it is still a good idea to verify and do research into the brokerage website or App of your choosing.
Agency problems are traditionally between the owners and managers of a business, but there is a very similar relationship between bitcoin owners and brokerage site owners. It is important to note that the problem in bitcoin is that owners of these brokerage sites and owners of bitcoin might not always have the same set of interests. Keep in mind, agency sites make money from fees related to trading and other instruments such as leverage rather than on the actual capital appreciation of the asset. This could incentivize the brokerage side to create or allow financial instruments that actually increased volatility of the assets in which they broker trades. The most common example in the last decade would be the financial crisis of 2008 in which banks ignored their responsibility as underwriters in an attempt to package for sale as many mortgage-backed securities as possible. It is important to understand what types of activities your exchange might be partaking in because inherently risky or illegal activities might possibly lead to your exchange declaring bankruptcy or being shut down by the governing body in the country where it originates.
As of the writing of this article, Gemini maintains that “[t]he majority of digital assets are stored offline in our proprietary Cold Storage system.” And Coinbase maintains that “98% of customer funds are stored offline”. Doing your due diligence and looking into the safety measures and policies of an exchange is essential for giving yourself the smallest possible chance of being a victim of fraud or theft.
Historically, the US has some of the strictest laws governing and regulating exchanges. While regulation might seem inhibitory at first glance, digging deeper we reveal some broadly overarching economic patterns. The legendary Walter Wriston, CEO of Citibank, said “Capital will always go where it’s welcome and stay where it’s well treated.” To be well treated any financial instrument must be transparent and free from fraud or potential abuse. Fair and meaningful financial regulation could be one important step toward generating a positive cash inflow into cryptocurrency projects such as bitcoin that propose to solve some of the world’s financial needs.
Dollar Cost Averaging, a Useful Strategy for Any Asset Class
Dollar cost averaging can lead to an effective way of reducing risk in an investment. This technique requires buying an asset over an extended period of time and at different price points, so that the total cost of an investment will be the average cost of the combined prices. It is important to note that reducing risk is another way of saying reducing volatility. So what is volatility in terms of a classical financial definition?
Based on investopedia, we find that:
“Volatility is a statistical measure of the dispersion of returns”
Dollar cost averaging will not produce the greatest theoretical return, which normally can only be attributed to perfectly timing the market and is something that is incredibly difficult, if not impossible to do, in an efficiently traded market given a long enough time frame. Dollar cost averaging will also not turn a losing investment into a winning investment and the investment must still be profitable in the long run for dollar cost averaging to produce a positive return. However, it will certainly help smooth out the volatility of returns and ensure that an investor is getting closest to the fairest price possible for a particular investment.
There are various reasons that investments at times might become oversold or overbought, meaning that at certain price points an investor might be paying too much for an overvalued asset or too little for an undervalued asset. Behaviorally, at times people might panic sell due to a fear of losing money or euphorically buy up assets without a rational premise in the hopes that prices will continue to rise.
Luck also can play a role in investment returns as unforeseen news can impact an investment both positively and negatively and to an extent that is hard for anyone to project prospectively. The advent of algorithmic trading sometimes creates periods in which selloffs occur due to a series of stop losses being hit. The most famous stock market flash crash happened on what is called Black Monday in 1987 where the Dow lost 22.6% of its value in a day. This was the largest single day percent price drop in the history of the Dow. After the dust settled, this crash was attributed to both a mass mechanical and behavioral over adjustment having little to do with a fundamental change in the market overnight.
Of course, propensity for risk is always up to the individual, but for an investor looking to reduce the volatility of his or her holdings, dollar cost averaging could be an effective way of doing this across a broad array of securities, commodities and alternative investments alike.
Ledger Nano S: 4 Reasons to Get One Now
The Nano S, built by Ledger, is a cryptocurrency hardware wallet which allows even those of us who aren’t tech-savy to keep our assets safe. It works by isolating your private keys, which are on your hardware wallet device, from your computer. It also forces you to confirm all transactions on the actual device, rather than your computer, which may be infected with malicious software. You generate a 24 word seed to recover your funds in the event that you lose your device. Visit here to learn more about the basics of the Nano S and hardware wallets.
Why you should pick up a Nano S
The Nano S, and competitors such as Trezor, are extremely secure against malicious software on your computer and individuals trying to access your private keys. In the case of the Nano S specifically, your private keys are generated in a secure environment on your hardware wallet. The Nano S uses a secure element to ensure firmware integrity on your device. The only case known to date of a Nano S being compromised is where human error was involved, not because of device failure.
The Nano S resembles a USB and is extremely light weight and compact. It can easily fit in your pocket or backpack and includes a lanyard so that you can wear it around your neck if you want. The buttons are readily located above the screen and make it simple to control your device.
Ledger regularly has capacity issues with producing their devices. Because of this, the prices can fluctuate based on demand and what they are able to supply at the time. Currently, the Nano S costs 79 Euros. I have seen it below 60 Euros, especially during special events such as Black Friday. This price is lower than several competitors.
Variety of Coins:
The Nano S can store the following coins: (note: Fido 2UF is the 2FA app)
Where the Nano S falls short
Low Storage Space:
When you want to access your funds on the Nano S, you must open the appropriate application on both your computer and hardware wallet. Unfortunately the Nano S has low storage space so it only allows you to have a handful of apps downloaded at the same time on the device. This does not impact the number of assets you can hold as you can delete and re-download apps without any effects on your money. It is merely an inconvenience.
As of right now, most currencies have a separate application on desktop. For example, there are two different applications for Bitcoin and Ether. It would be a lot easier if all the desktop applications were combined into one and you would simply activate individual wallets by opening the appropriate application on your device. This is the way that Trezor does it and that it should be done. I reached out to Ledger’s CEO to ask about the plan to release the new application. He said, “yes,” we are planning to release a new app and “we’ll publish more information this week (blogpost on ledger.fr).” It has now been 3 weeks since he sent that but to be fair Ledger has been busy lately. I would expect the new application to be released soon.
[UPDATE 2/23/2017 – Ledger has released the blog post detailing the new application which is a significant improvement to what they currently have.]
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