December 26, 2017

Bitcoin and Cryptocurrency Variants – The Basics, The 15 Known Risks and The Know-Hows

Bitcoin and Cryptocurrency Variants – The Basics, The 15 Known Risks and The Know-Hows

“What goes up, do come down, and up, and down again” – #volatility #quote

How it works?

Basically, Bitcoin allows two people to enter into a financial transaction without any middlemen. While it is simple to use, the technology is loaded with checks and balances to eliminate fraud. Part of what makes bitcoin valuable is the fact that there is a finite (limited) supply of 21 million bitcoins – no more will ever be created after the 21st million.

Bitcoin is purely digital, and is created as a blockchain application.

What is in each Bitcoin transaction? To simplify, each record of a unit of bitcoins is called a “block”, and all blocks are tied together sequentially using a cryptographic hash on the previous block and storing the information in the next block. This forms a chain of blocks, or blockchain. Each block of bitcoins contain information about who sends and receives a given unit of bitcoin (a transaction), as well as the signature that approves each transaction. Thus, making it unique and cannot be duplicated.

Bitcoin transactions are recorded on a ledger, called the Distributed Ledger Technology (DLT), distributed among users called the blockchain rather than on a central ledger maintained by a private company or the government. Satoshi Nakamoto, the anonymous developer of Bitcoin, had a vision that people will be able to spend money without middlemen, regulation, or the need to know or trust other parties.

How Bitcoin Address looks like?

 

 

1EHNa6Q4Jz2uvNExL497mE43ikXhwF6kZm

 

 

List of Known Risks associated to Bitcoins (and any other cryptocurrencies):

Risk #1 – Not regulated

The Bitcoin and other cryptocurrencies are not regulated by governments in many countries. It is at your own diligence to start owning Bitcoins or any other cryptocurrencies.

Risk #2 – Early Adopters flood the market

Cryptocurrency veterans say a small number of so-called whales hold many of the bitcoins in circulation, because they invested early, when Bitcoins were cheap. Such investors could short the Bitcoin prices, then dump their stash of Bitcoins, causing a world-wide price crash and profiting from their short trade, while also cashing in their years-old Bitcoin (investment).

Risk #3 – Supply and Demand

Back to the basics of economics – supply and demand. As more individuals want to exchange other currencies for Bitcoin, the value increases. In the current market, many believe Bitcoin investment is a good investment and thus they’re purchasing Bitcoins and holding onto them. When more people buy Bitcoins to simply hold it for value, the amount in circulation decreases. As the available supply decreases, the value increases. As the demand increases—and if supply stays the same or decreases—the value increases.

Risk #4 – Bitcoin transactions are not reversible / refundable

Any transaction issued with Bitcoin cannot be reversed, they can only be refunded by the person receiving the funds. That means you should take care to do business with people and organizations you know and trust, or who have an established reputation. So, if your Bitcoin gets stolen by hackers, there is no way to recover it.

Risk #5 – Bitcoin transactions are not anonymous

Some effort is required to protect your privacy with Bitcoin. All Bitcoin transactions are transparent for the whole world to see and are stored publicly and permanently on the network, which means anyone can see the balance and transactions of any Bitcoin address. However, the identity of the user behind an address remains unknown until such information is revealed during a transaction. This is one of the reason why Bitcoin addresses is recommended to be used once only. Always remember that it is your responsibility to adopt good practices in order to protect your privacy.

People might not be able to link the identity to Bitcoin right away, but once they do – they can track everything you’ve ever done on the Bitcoin network. This makes it a particularly bad tool for illicit use.

Risk #6 – Member-Get-Member or Fraud Agents

There are hundreds of cryptocurrency exchanges available online. There are also many fake agents selling cryptocurrencies with the promise of delivering high returns. It is difficult for a layman to identify such agents. If you really need to invest in Bitcoins, refer to the list at the end of the page (or by clicking here) on where to get Bitcoins. My personal advice is to avoid these scheme operators.

Risk #7 – 51% attack rendering ecosystem collapse

Every-time when the halving event occurs, the miners running older equipment will suffer. Industry experts estimate that 25% of computers will probably be unprofitable due to halving event. If they’re taken offline, the hashrate (a metric that quantifies the processing power of the bitcoin network) would fall, and the bitcoin network could be less secure.

There’s a hypothetical scenario called a “51% attack” where a miner takes over 51% of the processing power in the bitcoin network. Since the miner controls the majority of the network, it can make fraudulent transactions and confirm them on its own, or spend bitcoins that have already been spent. It would create a chain effect that would probably bring down the whole bitcoin ecosystem (or any other cryptocurrencies).

Risk #8 – Other Systematic Cyberattacks towards Bitcoin Networks with focus on Exchanges

Since Bitcoin and other cryptocurrency variants appear, many hackers are starting to hack the Bitcoin or the cryptocurrencies’ ecosystems. Why they do it? Some may do it for fame, some may do it for fun, some may do it for profits or hijacks, and some may just want to see if there are any weaknesses or loopholes inside the Bitcoin or the cryptocurrencies’ ecosystems – Wallets? Vaults? Exchanges? Ledgers? Websites that accept Bitcoins or any other cryptocurrencies? The final effect is towards the investors if such ecosystem is suspended, collapsed or closed down (filing for bankruptcy).

Risk #9 – Private Keys

Private Keys are like much more secure electronic cash systems, it is basically a system messaging service secured with public key cryptography (algorithm-generated).

When a Bitcoin user loses his or her Private Keys, that user will lose the access to his or her Bitcoin storage. It is also important for him or her to make sure that no one steals his or her Private Keys, because if they do they can unlock his storage and steal his or her Bitcoins. So it is important for the Bitcoin user to keep the Private Keys safe, or entrust it with someone that can do so. The Private Keys are crucial to recovering those coins.

Risk #10 – Wallets, vaults and Wallet Address change issue

Note: For security reasons, we don’t publicly tell where we keep our bitcoins (or any other cryptocurrencies).

It can only take one rogue employee or an experienced hacker with access to the naked keys and your Bitcoins can gone forever. Your money in the wallet is useless, if you forgot your password to the wallet or vault.

For more information and scenarios on how Wallet Address change can be an issue to layman users, read the article from this website: https://bitzuma.com/posts/five-ways-to-lose-money-with-bitcoin-change-addresses/

Case examples:

a) Case of Pony Botnet – criminals used the Pony botnet to infect large number of computers, stealing bitcoins and other cryptocurrencies stored locally on computers – the case of storing bitcoin wallets on Internet-connected devices
b) Case of Silk Road v 2.0 – possibility of website operator stealing bitcoins from site visitors

Risk #11 – Dodgy exchanges and/or Exchanges Shut Down by Regulators

The dangers of large Bitcoin exchanges such as Mt. Gox and Silk Road 2.0 either being hacked or imploding and going offline are not so easily dismissed. The lack of a central authority that regulates Bitcoins can be seen as a strength, but it is also a weakness. We trust banks because we know that they are heavily regulated.

There are news reports that the operations of exchanges can also be shut down by law enforcement agencies, if the cryptocurrency intermediary is found to have used Bitcoins or any other variant cryptocurrencies for illegal purposes.

Case example: Bitcoin exchange Mt. Gox – filing for bankruptcy – lost bitcoins

Risk #12 – Social Influencer

Risk – Social Influencer sells bitcoins (or any other cryptocurrency variants) – followers sell too – dumping / take profit before price drops

A scenario where if one or more Social Influencers made the announcement to sell most or all his or her cryptocurrencies, the followers will shadow (copy) his or her actions, which then will create panic in the Bitcoin or any other cryptocurrency market.

Risk #13 – ATMs and Debit Cards

Since Bitcoin is not regulated in most countries, the ATMs may be seized for unlicensed operations. There may also be scenarios where ATMs system is down or not dispensing the expected withdrawals, hence will not be able to satisfy our issues and disputes, because there are no central authority to lodge our report to.

Risk #14 – Natural Disaster

Bitcoins or any other cryptocurrency variants are useless when Natural Disaster happens – mainly due to we need to be online to make withdrawals. Based on reports, at this particular time, most people will go for barter systems and inflation rate is extremely high.

Risk #15 – The Rise of Better Cryptocurrencies via ICO – Initial Coin Offering

Everyday new attempts to create better cryptocurrencies system are introduced in the crypto marketplace via Initial Coin Offering (ICO) or similar platform. Since ICO is also not regulated, it is always advisable for collectors to do their due diligence before participating.

Note: All risks here are sourced from various technology websites and forums, news and journal websites, investment websites and forums, bitcoin and cryptocurrency websites and blogs. I will not be crediting each websites individually because most risks are similar to one another. In this article, I am giving my opinion on the risks listed for your perusal and knowledge.

A short video from Youtube explaining how Bitcoins work:
https://www.youtube.com/watch?v=Lx9zgZCMqXE&feature=youtu.be

However …

If you wish to own and keep your Bitcoins or any other cryptocurrency variants, these are the things that you ought to know first …

Personally, I do not recommend any other Bitcoin variants, as the other cryptocurrencies were created to either copycat-and-jump into the Bitcoin revolution or it could also be used to further enhance the Bitcoin technology. You decide and make your own due diligence.

Things to know:

1. Satoshi is the smallest denomination of a bitcoin – to commemorate the founder of Bitcoin, Satoshi Nakamoto.

• 1 BTC = 1,000 mBTC (millibitcoin)
• 1 BTC = 1,000,000 μBTC (microbitcoin)
• 1 BTC = 100,000,000 Satoshis
• 1 mBTC = 100,000 Satoshis
• 1 μBTC (microbitcoin) = 100 Satoshis

Click here to test the Satoshi to Bitcoin calculator – http://satoshitobitcoin.co/

2. In FX – Bitcoin is noted as XBT or on some platform noted as BTC

3. Bitcoin Halving

In short, Bitcoins are released into the market on average every 10 minutes. The system started out rewarding the computer that successfully mined the right block with 50 Bitcoins, then in mid-2012, it fell to 25 Bitcoins, and in mid-2016 the number fell to 12.5 Bitcoins. This amount is halved every 4 years and this halving process is called Bitcoin Halving. Refer to these websites for more information on halving:

http://www.bitcoinblockhalf.com/
http://www.thehalvening.com/

4. My personal take on Bitcoin and any other cryptocurrency variants, these assets are just collectibles, and not investment schemes. I treat Bitcoin and any other cryptocurrency variants just like high-end arts – due to its nature as being limited and cannot be reproduced. Just like high-end arts, the value can go up and down when there is a demand for it.

——————————————

How to own?

  1. Mining – for new miners now is not recommended as the mining rigs are too expensive to own and operate – if you still can get access to cheap mining rigs – be careful as it may be the old version of mining rigs used in previous halving phase.
  2. Buy at Bitcoin Exchanges – be careful with dodgy exchanges, refer to Risk #11 above
  3. Buy from other Bitcoin Collectors
  4. Sell your stuffs online (or offline) and get paid in Bitcoin
  5. Get paid in Bitcoin i.e. xbtfreelancer.com – mostly IT-based jobs
  6. Bitcoin Faucets – Reward system. Collect free Satoshis by completing website challenges i.e. Human Check Captcha challenge with daily bonuses and/or referral bonus

Where to keep your Bitcoins?

  1. USB Vault – offline
  2. Wallets offered by online wallet providers and/or by bitcoin exchanges
  3. Apps downloaded to your mobile devices – storing electronic version of public and private keys
  4. Paper-based wallets – printout version of public and private keys on a single piece of paper

For further readings …

The Original Bitcoin Paper at http://bitcoin.org/bitcoin.pdf

SegWit (Segregated Witness) – a scaling solution for Block Size Limit of cryptocurrency Bitcoin (BIP141 – Bitcoin Improvement Protocol)

Transaction Malleability

Algorithms that you can read further related to Bitcoins:

– SHA-256 – Same algorithm used in most Internet Payment Gateway system
– ECDSA – Elliptic Curve Digital Signature Algorithm / ECC – Elliptic Curve Cryptography
– Mathematical Trap Door

 

 

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