Category: Cryptocurrency

Cryptocurrency Hacks – How to Protect Yourself When Trading And Investing

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If you follow crypto markets, you are probably aware of this weekend’s massive theft of digital currency from a Japan-based exchange. In the early hours of Friday January 26th Coincheck Inc. was hacked and nearly $500 million in NEM digital tokens were stolen. Mercifully, Coincheck seem to have the means to reimburse their customers, albeit after a slight haircut, but once again security is a hot topic when it comes to crypto trading and investing.

So how can you protect yourself and still participate in the cryptocurrency phenomenon? Here are a few things to consider:

Are you trading or investing? – first off be clear on what your strategy is. Are you actively trading, or buying and holding?

Traders – If you are trading crypto then you will be using an exchange and, as we have seen, exchanges can be vulnerable to hacks. That is a risk you will have to take, but at least exercise caution. If you are in Japan, for example, make sure you are using an exchange that is registered with the Financial Services Agency. The site is in Japanese but you can find a list here. (I couldn’t find the same page on their English site) Note though that Coincheck had applied to register and was allowed to continue trading, and advertising on TV, during the approval process. FSA registration does not guarantee that your funds are safe, but I would not bother with exchanges that don’t make this list. If you are trading outside Japan Buy Bitcoin Worldwide is a useful resource for finding exchanges in your country, along with a list of pros and cons for each exchange.

You should be looking for exchanges that implement at least the following measures:

  • Cold wallet – the recent hack was from Coincheck’s hot wallet, which is connected to external networks
  • Whitelisting of all withdrawal addresses for crypto
  • Private server
  • Two-factor authentication
  • No API withdrawals

If you are done with trading, or taking a break for a while, you should be moving your coins off the exchange to a private wallet or storage device.

Investors – perhaps you just want to buy some Bitcoin or Ethereum and hold it for the long term? In this case you will likely buy the coins on an exchange, but you then need to move them into a private wallet. If you leave crypto sitting on the exchange you are at risk.

Online wallets are convenient for shopping with Bitcoin but they are also not a safe place to store your coins.

I stored Bitcoin with Xapo, whose vault service is currently free of charge. They store their private keys in multi-signature form in vaults in Asia, the United States and South America.

Hardcore crypto enthusiasts will tell you to keep your private keys completely offline. Probably the most popular hardware wallet is the Trezor device. With this device a pin code gives you access to your coins, and if you lose it you can regenerate your wallet using the 24 word recovery code.

If you don’t trust any storage solution that can be plugged into a computer, or are looking for a near indestructible back up for your hardware wallet then take a look at Cryptosteel.

Lastly, don’t get carried away with the promise of high returns. Only invest / trade amounts commensurate with your level of knowledge. If a large portion of your assets are in cryptocurrency you better be an expert!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

2018 Investment Outlook

 

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“Prediction is very difficult, especially if it’s about the future.” – Niels Bohr.

People interested in investing typically find themselves deluged with forecasts at this time of year, and a look back at investment professional’s predictions from this time last year will tell you just how difficult it is to be right. So, I’m going to be careful here! The purpose of this post is not to make bold predictions for the year, and it is certainly not to be considered investment advice. However it is interesting to take a look at current trends, along with results from last year, and consider how things might develop in 2018. So here we go…

2017 was supposed to be the year of the crash. This time last year every forecaster worth his salt was telling us that winter was coming. The Trump rally couldn’t last, central banks had to taper their stimulus programs, and the party was going to end. It was going to get ugly…

Well… S&P 500 +21.8%…. MSCI Emerging Markets +31%…. MSCI Europe +14.5%…. UK FTSE 100 +11.9%…. Japan Topix 22.2%…. even Japan hit 26 year highs!

Oil came back strongly at year end, gold was up double digits, even pound sterling recovered somewhat. Not to mention the surge in Cryptocurrency! 2017 was not a good year to be holed up in your bunker, hoarding cash and waiting for the sky to fall. What was perhaps most surprising was the lack of volatility through the year – the US stock market hasn’t seen a major pullback since the election, and volatility metrics have hit record lows.

So the party goes on, right?

Well, we will see. The fact remains that we are living in an unreal world economically. Negative interest rates are not supposed to be a thing, but they are currently reality in several countries. Moreover, negative real interest rates (when taking inflation into account) have been the norm in the developed world since October 2016. On January 9th the Bank of Japan announced that it was reducing the rate of bond purchases as part of its quantitive easing program. This reduction was relatively small, and well within the BOJ’s stated goals. It was really a non-event. However, as soon as it was announced, the Yen spiked up and markets shuddered. So imagine where we’ll be if something really happens…

The US Federal Reserve has gradually increased interest rates, and so far managed to do so without slowing the stock market’s bull run. Japan, however, is another matter. The run up in the Nikkei at the end of 2017 / early 2018 owes a lot to loose monetary policy, not to mention massive ETF purchases by the BOJ. The Abe administration doesn’t want the run to end, but it can’t go on forever.

Sorry if this is too much detail, but what I’m really saying is the crash / correction is still coming. It’s just a matter of time.

Given what happened last year, this doesn’t necessarily mean you should liquidate everything and crawl into your bunker right now. We have no idea how much longer the party will run before the inevitable end. The important thing is to know the end is coming and to plan accordingly. Here are some ways we can all do that:

Diversify – if you are 100% in stocks today, you are perhaps overexposed. It could be a good time to move into a more diversified asset allocation.

Rebalance – if you are already in a diversified allocation but have not made any changes recently, you may find that the stock run-up has left you overweight equities. You may have started with 40% in stocks but now that weighting is over 50%. Rebalancing back to your original asset allocation is a disciplined way to buy low and sell high.

Consider getting some gold – if you haven’t already, you may want to make an allocation to gold, which tends to perform well when panic sets in. Also commodity prices seem to be turning around in general, which is good news for metals.

Expect a strong Yen – we’ve seen time and again that the Yen is seen as a safe haven in times of trouble. If you live in Japan and send money home, there may be a big opportunity coming your way.

Stick to your plan – if you are relatively young and investing for the long term, you don’t need to worry too much about market downturns. Remember why you started in the first place and don’t panic.

Keep some powder dry – a crash is a fabulous opportunity to buy cheap. Have some cash at the ready and be greedy when others are fearful.

Consider inverse ETFs – if you are particularly aggressive and have a high level of conviction that the market will go down, then inverse ETFs are a simple way to short the market. Inverse ETFs use derivatives to profit from a decline in an underlying benchmark. Be aware that many of these ETFs are leveraged, and not only magnify returns, but can double or triple your losses if you are wrong.

Finally, a word on Cryptocurrency: After the incredible run of Bitcoin and numerous other coins last year, more and more people are getting into crypto trading and investing. The digitalisation of money is just beginning, and there are fantastic opportunities out there, but do your own research. Buying Bitcoin with no knowledge of how it works, just because it’s going up in value, is pure folly. I’m not going to tell you Bitcoin is or isn’t in a bubble, or that Ripple or Litecoin are going to take over. If you are interested in the concept of cryptocurrency then study it, invest a little to get some skin in the game, and study some more. Only invest according to your level of knowledge and don’t get caught up in herd mentality.

With that I wish you all the best in 2018. Let’s hope winter doesn’t come too soon.

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

 

 

What is the Blockchain?

If you haven’t heard of Bitcoin by now then you really must have been living under a rock. Since the beginning of 2017 the best known cryptocurrency has risen some 17-fold. There’s a lot of noise about Bitcoin right now, and no surprise, but it’s important to remember that there’s a technology behind this phenomenon that is already changing the world.

If you are a little confused about what exactly the blockchain is, and intrigued by what it can do, then this 17 minute Tedx talk by William Mougayar will help to clear things up. Understand what the Blockchain Economy will look like, and how you can participate in it:

How to Buy and Store Bitcoin

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Following my previous post on investing in Bitcoin, here are a few pointers on how to go about actually buying it if you have decided to do so. Obviously this is not investment advice, it’s meant as a practical guide:

Firstly, beware! Cryptocurrency is still relatively new and it is not well regulated. Scams abound and many people have seen their hard-earned money disappear simply from choosing the wrong place to buy and store it. Make sure you do your research!

Buying Bitcoin

The easiest way to purchase Bitcoin is to open an account with a reputable Bitcoin exchange. If you are expecting to be able to do this nearly anonymously and with a minimum of ID documentation, I’m sorry to disappoint you. You will need to submit a copy of your ID, passport is the usual but other government issued ID’s will work, and a copy of a utility bill or bank statement to prove your residential address. If you live in Japan and are using an exchange outside Japan, then this document will need to be in English. Although paper statements are a little old fashioned, I recommend having your bank at home send you one every quarter so you have an English proof of address available. You will need it for pretty much any international financial transaction these days.

If you are looking for an exchange in Japan, Bitflier seems to be the largest.

If you prefer to buy your coins overseas, then some of the well known exchanges that will accept residents in Japan and other parts of Asia are Kraken, Gemini, and Xapo. I was recommended Bitstamp as a popular European exchange but they took two weeks to “review” my application and then came back and said they hadn’t received the documents I had uploaded…

Buy Bitcoin Worldwide is a useful resource for finding exchanges in your country, along with a list of pros and cons for each exchange.

If you are looking to invest over $20,000 then Genesis Trading has a well connected OTC desk.

Storing Bitcoin Securely

It is not advisable to leave your Bitcoins sitting on the exchange after purchasing them. Although security is improving, almost none of them are insured against theft and hacks still happen fairly regularly. Online wallets are convenient for shopping with Bitcoin but they are also not a safe place to store your coins.

I stored mine with Xapo, whose vault service is currently free of charge. They store their private keys in multi-signature form in vaults in Asia, the United States and South America.

Hardcore Bitcoin enthusiasts will tell you to keep your private keys completely offline. Probably the most popular hardware wallet is the Trezor device. With this device a pin code gives you access to your coins, and if you lose it you can regenerate your wallet using the 24 word recovery code.

If you don’t trust any storage solution that can be plugged into a computer, or are looking for a near indestructible back up for your hardware wallet then take a look at Cryptosteel.

I hope this is useful. The prospects for Bitcoin going forward are certainly exciting, but as I’m sure you are aware, the potential upside comes with significant risk. Don’t invest more than you can afford to lose is still the number one rule.

 

 

 

Bitcoin – a worthy investment?

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“All I ever seem to hear about these days is Bitcoin.”

Someone said this to me the other day and I had to agree. Particularly in Japan, after Bitcoin was recognised as a legal payment method 3 months ago, resulting in a huge spike in trading, not to mention in price. So, if you’re sick of hearing about Bitcoin I apologise, but it’s hard to ignore it when discussing money and investments these days.

The purpose of this post is to consider Bitcoin, or other cryptocurrency, from a longer term investment perspective. Firstly, cryptocurrency is obviously a satellite holding. If you don’t understand what I mean by that, you may want to check out this post on Core vs Satellite.

As by far the dominant digital currency, there is incredible potential for Bitcoin technology to compete with existing infrastructure such as:

  • $2 trillion annual market for electronic payments
  • $1 trillion annual e-commerce market
  • $514 billion annual remittance market
  • $7 trillion gold market
  • $4.5 trillion cash market
  • $16.7 trillion offshore deposit market

There are also some significant risks associated with Bitcoin. The four most prominent being:

  • a better digital currency emerging and stealing the market lead
  • an undetected bug in the system
  • a hard fork (when some nodes in the network upgrade to software that is incompatible with previous versions) causing the Bitcoin payment network to split in two
  • a sustained attack by an organisation with substantial financial resources (e.g. a government)

Bitcoin enthusiasts have rebuttals for each of these risks, but they have to be taken seriously. That said, there is no sign of Bitcoin going away any time soon. If you think the potential upside is worth the risk, here are some simple investment guidelines:

  • Start with Bitcoin rather than other, less prominent cryptocurrencies
  • Don’t invest more than you can afford to lose. 1-2% of your total assets is a good guide.
  • Expect volatility – even people used to stock market volatility will find this a rollercoaster. Don’t invest if it’s going to prevent you sleeping at night.
  • Plan to hold for the long term
  • Consider dollar cost averaging to begin with
  • Study up on how to store your Bitcoins safely – don’t leave them sitting on an exchange
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