Tag Archive | "digital currency"

Risks and Concerns On Trading Digital Currency


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Earlier we wrote an introduction into trading digital currency and Bitcoin (BTC). One of the most important parts of trading and investing, in general, is knowing the risks involved. When trading virtual currency, it is especially crucial to choose the right exchange, follow relevant world events and understanding where and how to appropriately store your digital money.

Trading Digital Currency and Government Regulation

trading digital currency

As was mentioned before, virtual currencies are not recognized or regulated directly by governments. This had led to some recent clashes; the most notable with the US government.

Just last week a major digital currency exchange system, Liberty Reserve, was shut down. Its owners were charged with money laundering for failing to comply with the Know Your Customer (KYC) and other Anti-Money Laundering (AML) regulations regarding the nature of the transactions into their currency. Investigators claimed that they were able to create and utilize accounts with bogus names. Prosecutors claimed the service was mainly being used anonymously to conduct criminal activities.

Liberty Reserve was a different type of digital currency trading system than Bitcoin in that it’s ledgers were centralized. The trading between US dollars or Euros were performed by external exchanges and not by the reserve itself. These exchangers charged a high level fee to exchange in and out of the Liberty Reserve system. Being that these internal transactions could be sent completely anonymous, those looking to conceal and launder the proceeds of illegal activities would be willing to pay the excessive internal and external exchanger charges.

Bitcoin has recently suffered dissimilar setbacks in the regulation of its largest exchanges. In the past month, the largest Bitcoin exchange MtGox had its US accounts seized because the owner failed to declare that he was operating a Money Services Business (MSB). The exchange continues to operate, but it is difficult for Americans to retrieve their deposits in dollars instead of Bitcoin.

Bitcoin and newer cryptocurrencies don’t suffer from many of the same problems as Liberty Reserve because the currency itself is decentralized much like modern P2P (Peer to Peer) filesharing clients. It is also much easier to exchange between these coin and fiat currencies as the fees are much lower than bank wires or paypal. Finally, all transaction records are public and can be traced back, giving the so there is more of an argument to use Bitcoin for legitimate purchases.

Staying Secure While Trading Digital Currency

One of the consistent ongoing threats to using a digital currency is the threat of losing an investment to hackers. Bitcoin has proven itself very resilient to all hacking attempts on the currency. Since 2008 there has been no way to counterfeit Bitcoin and no one has managed to spend the same coin twice. This is a major reason the value has been so resilient to other negative news.

While the currency itself is secure, the exchanges have proven to be anything but secure. Nearly every major exchange has experienced theft of some amount of Bitcoin either through an internal security breach by a disgruntled ex-employee or through outright hacking attempts by various groups. As Bitcoin can’t be charged back, there is no way to “freeze” this money. The best attempts out there are to trace its public record of transactions and try to block stolen Bitcoin from trading on large exchanges, much like the US government can flag serial number ranges on paper money.

trading digital currency 2

Another attack on the exchanges has been via a Distributed Denial of Service (DDOS) attack, where a hacker controls a large number of compromised computers and floods the exchange with various commands and requests. The exchange becomes bogged down and trades begin to lag significantly. This makes it difficult for the order book to fill up and the spreads increase. In the most recent significant price drop hackers were able to manipulate the perceived value of Bitcoin by stalling the major exchanges and causing a price drop, then ceasing the attacks and letting the value rise again.

For end-users of virtual currency it is advised to keep a “cold copy” of their digital wallet encrypted in a USB drive or burned to a CD. Virtual currency is most vulnerable when stored at a third-party or kept accessible by a internet connection. Loss of personal funds usually happens in one of two ways:

  • A local copy of a Bitcoin wallet gets destroyed by a failing computer or deleted by user error, the coins are not recoverable.
  • Coins are stolen through a trojan and/or phishing attack on the system. This usually happens on Windows but can happen on other OS by using outdated Java. Once the coins are stolen, again it may be possible to trace, but unlikely to ever recover.

There have indeed been cases in the past year where some users lost BTC wallets worth over $100,000 USD due to poor security practices. Phishing attacks can also rob users of funds stored in third-party wallets or exchanges by tricking them into entering their login details to a fake page.

Moving Forward

Despite the above risks, trading digital currency like Bitcoin can be an exciting way to diversify your investment portfolio especially if you already engage in forex trade. Many of the above risks can happen with traditional brokerage accounts if the investor has poor security practices and fails to keep an updated system. Contrary to the above setbacks, the market for virtual currency continues to grow and is expected to continue to do so.

Are digital currencies like Bitcoin too vulnerable to theft? Would you invest in Bitcoin or are the risks of being hacked too high?

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Posted in Stock Market NewsComments Off on Risks and Concerns On Trading Digital Currency

What Is Bitcoin? An Intro to Digital Currency


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There is an exciting new market emerging in the form of digital currency, and many asking what is bitcoin? Digital currencies have existed for years in the form of centralized digital gold currency. In the past few years though a new kind of digital currency based on cryptography has risen.  The most well known of these crypto-currencies is Bitcoin.

what is bitcoin

What Is Bitcoin?

Bitcoin is a decentralized, peer-to-peer, deflationary currency first emerged in 2008. This form of currency relies on massive amounts of computer power to create new coin through a process called “mining.”  In many ways its comparable to gold. Both have a maximum amount that can be acquired through mining. As more bitcoin is mined the more difficult it is to mine, causing less to be found.  Eventually, bitcoin will reach a maximum of 21 million coins after which no new coin can be mined.  Because of the limited amount like gold, bitcoin is deflationary.  For investors, this makes bitcoin a very interesting hedge for inflationary fiat currency (physical currency, like the US dollar).

Since 2009, the value of bitcoin has increased over 30,000%.  From the beginning of this year up to June 1st bitcoin has increased over 900% alone.  It has outperformed every other market in long-term growth and the size of the market is now worth nearly $1.25 billion. What’s even more intriguing is it’s consistent growth each month.

Explore the Bitcoin Market

what is bitcoinThere are many attractions to a digital currency like bitcoin.  The most obvious attraction is that bitcoin is digital, not taking up any physical space unlike paper currency or gold. It can be stored on a flash drive, a computer, a mobile phone, a QR code (seriously!), on a physical coin with tamper-proof holographs, or even in a “brain wallet” which is actually a phrase that you would memorize.

Another huge attraction is it’s independence and freedom from government and bank control.  Funds in a bitcoin wallet cannot be frozen or confiscated!  There are no central banks controlling the supply of bitcoin and it isn’t influenced by the status of any country’s economy.  Recently many investors have flocked to bitcoin, especially those in the Euro-zone debt crisis involving Cyprus.

Another attraction to bitcoin is it’s very low and often times non-existent transaction fee to send a transaction to anyone, anywhere in the world.  For those of you looking to avoid high merchant fees charged by credit cards or money transfer services like Western Union, bitcoin is a great alternative. Transactions across the bitcoin network appear in seconds and confirm in minutes! It’s also not possible to chargeback a bitcoin transaction which eliminates a lot of the common scams performed using services like PayPal.  Unlike traditional currency, every bitcoin transaction record is public, so it’s trivial to prove that someone was paid.

In the past year alone the value for one bitcoin has increased over 1000%.  How many other types of currency have you seen increase at a similar rate? What is really appealing to curious traders is how each bitcoin can be divided down into 100 million smaller pieces called satoshis. By doing so it’s still possible to buy very small amounts of a bitcoin even as the value continues to climb.  There have also been proposals for alternative ways to count small amounts of bitcoin more efficiently, like the tonal bitcoin.

How Do I Buy Bitcoin? What Are Bitcoin Exchanges?

You can buy and sell bitcoin in a number of different ways. The highest volume method has been using bitcoin exchanges.  These function much like a forex exchange in which a fiat or other digital currency is exchanged for bitcoin.  The drawbacks in using these exchanges have been the fees they charge and the security risk of letting a third party hold the bitcoin.  Another way to trade have been through the over-the-counter (OTC) community.  OTC uses a web-of-trust system between individual traders to negotiate payment.  With OTC you may avoid the fees and security risk, but it’s much more difficult to trade and a lot easier to get scammed.  Lastly, some people use mobile apps to carry their bitcoin with them and do face-to-face transactions with fiat cash for bitcoin.

Digital currency and bitcoin are lucrative, but are not without their faults.  Historically, bitcoin has been exceedingly volatile and the exchanges have experienced some pressure from federal regulators. During the largest exchange involving MtGox, their US accounts were seized for not properly registering their accounts as a Money Services Business (MSB). Additionally other domestic exchanges have closed due to the costs of acquiring a proper licence to operate in the country.   In April the value of bitcoin went from $266 to approximately $50 before rebounding to over $120.  This has made bitcoin incredibly exciting to trade but also difficult to keep as an investment.

Are digital currencies and bitcoin the future? Will we all be buying bitcoin? What do you think?

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(photo credits to: En.Bitcoin.It/Wiki)

Posted in Alternative InvestmentsComments Off on What Is Bitcoin? An Intro to Digital Currency


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