Cryptocurrency Scams and How To Avoid Them

This year alone, more people would probably have heard about cryptocurrency, bitcoin, or ethereum for the very first time. I personally have had more people asking me about it just these past few months than in all the previous years combined. Even our city is set to have its very own Cryptocurrency Expo this coming October 7.

Of course, this is all thanks to the meteoric rise of bitcoin’s value, only $900 at the beginning of the year, to almost $5000 last August, and has since dropped to around $4000 as of this writing. That means if you bought bitcoin last January and sold it last August, you would have made 5 times what you initially invested.

More dramatic than bitcoin’s rise however, is its lesser known rival, ethereum, which traded for only $10 in January but reached a high of almost $400 last August. So if you had bought ethereum in January and sold it in August, you would have made roughly 40 times your initial investment in less than a year.

It is no wonder then, that cryptocurrencies (the general term for these new breed of digital currencies) have been making the headlines recently. The recent surge in prices are in part due to increased demand from those who want to own bitcoin or ethereum or some other cryptocurrency (and yes, there are hundreds of them) for the very first time.

Of course, with every opportunity, scams and scammers abound as well. There will always be shady individuals ready to take advantage of your lack of knowledge, or your eagerness to get rich quick. The realm of cryptocurrency is no exception and we have seen our fair share of scams that have come and gone as well.

So if you are planning to invest in cryptocurrency, please take note of the following:

  1. Investing in cryptocurrency is A RISK. It is highly speculative. Anyone who tells you otherwise, who entices you with words like “low-risk” or “zero-risk” is probably up to no good. The cryptocurrency market is a DEREGULATED market. That means ANYTHING can happen to the market price. It can go up to $5000 dollars in one day, and it can also drop back to $500 another day. There is no officiating body controlling or regulating market prices. It is purely driven by the laws of supply and demand. As such, my advice to those wanting to take the plunge is to put in only money that you can afford to lose.
  2. There is NO GUARANTEED income. In fact, there may not even be an income. You may lose your money. Anyone who approaches you with some sort of guarantee (even a seemingly small amount like 1%) is probably up to no good. If people ask for your money to “invest” with them, be very suspicious. These days, you can already buy bitcoin directly at coins.ph, buybitcoin.ph or rebit.ph. You can read more about these platforms at https://cointelegraph.com/news/3-major-bitcoin-platforms-in-philippines-efficiency-comparison-test. Once you have your bitcoins, you can easily buy other cryptocurrencies with that. There is no need for you to give your money to someone for him/her to “invest.”
  3. Network Marketing is a No-No. I am not a network marketing hater. In fact, I am a former network marketer, have many friends still in the industry and I have written several articles in defense of legitimate network marketing. But knowing what I know about it, I can safely say that cryptocurrency and network marketing simply do not mix. There have been cryptocurrencies that have been launched network-marketing style and I have yet to see one with any prospect of long term success. Why is this? Well, network marketing relies on guaranteed income and bonuses and that contradicts what I wrote in number 2.
  4. Learn, learn, learn. As with any investment, nothing beats understanding why you are betting your money on it. I learned about Ethereum in 2015 and understood its potential. Perhaps because of my background in computers and technology, it was easier for me to absorb the technicalities. However, there are tons of materials out there that make it easy for the layman to understand this new technology and its promise for the future. It’s always a wiser decision for you to know exactly why you’re putting your money where it is, than simply putting it there because everyone else is saying that’s where you should invest. You have a responsibility to educate yourself.

You may start with these articles:

Cryptocurrency 101

The Absolute Beginner’s Guide to Cryptocurrency Investing

A Beginner’s Guide to Blockchain Technology

 

Originally published in Sunstar Davao.

Email me at andy@freethinking.me. View previous articles at www.freethinking.me.

Cryptocurrency 101 (Part 5)

Photo by JD Hancock

Part 1     Part 2     Part 3    Part 4

Having written about the basics of cryptocurrency and blockchain computing the past 4 weeks, I now want to conclude this series by addressing certain common objections that people inevitably make every so often. Since most people are familiar with bitcoin, I will use bitcoin as a general term. So when I mention “bitcoin” it not only refers to bitcoin per se but to other types of cryptocurrency as well, unless explicitly stated.

  • Bitcoin is not backed by anything.

People who make this objection usually say that our money is backed up by our government’s gold reserves or something like that, but that is actually an argument from ignorance. As early as 1931, Britain abandoned the gold standard of money and it was quickly followed by the US in 1933. Today, no government in the world uses the gold standard.

Instead we are now using fiat money — which is essentially money that the government mandates to be accepted as a means of payment. In other words, our money today is not backed by anything except the government’s say-so that it is valuable. Even then, even our government does not control the value of our currency but is instead dependent on the world market for our currency — like any other currency in existence — cryptocurrency included.

The underlying implication of this objection is that bitcoin has no value in itself. It’s all just electronic signals in a computer. But this overlooks the fact that the same can be said for fiat money. It has no value for itself — it’s just pieces of paper and bits of metal. If the government collapses, the currency becomes worthless.

Even gold and silver have no intrinsic value other than being rare and shiny perhaps. Now, I would even argue that the intrinsic value of bitcoin lies in the security of its network as well as its portability. No other currency can match bitcoin’s portability. I can go to any country that has internet and send the to anyone or receive them from anyone in the world. Even if entire countries like the US or China gets blocked off from the internet, bitcoin will still be running and I will still have access to my coins because they can’t be blocked or frozen by any government.

  • Bitcoin has no central authority.

Again, this comes from a mindset that a country’s currency is backed (or controlled) by its government. Someone told me, “If the Philippine peso fails, then I know who to run to or to blame.”

My response is, if the government fails, well yes, you can blame the government but there is now no government to run to. And so what if you can blame the government? That will not bring back the value of your money.

In fact, the one using this objection misses the point entirely that the power of bitcoin resides in its being decentralized — that it is quite difficult for any one entity to control and manipulate the currency because of the way the blockchain works. That it has no central authority is actually an advantage rather than a disadvantage. As I mentioned in #1, no one and I mean no one can freeze my bitcoins. As long as I have my private keys, I will always be able to access my bitcoins and no government or any other entity can stop that.

  • The bitcoin market is too volatile and risky.

This is true. When I started on this series, the price of bitcoin was at an all-time high of around $2900. Since then, it has dropped briefly to around $2,200 and is now hovering at around $2,600. Those are some pretty wild swings in a four-week span.

However, I approach risk not in terms of avoiding it but in how to manage it. As a businessman, I understand that there is risk in everything that I do. There is risk even in crossing the street or driving my car to work. One cannot avoid risk. One can only manage it.

The way I manage risk when investing in bitcoin is to use only extra money — money that I can afford to lose or to keep dormant for a few months or even a few years. That way, if the price of bitcoin drops suddenly, I won’t panic and begin to sell it off because I need the cash. I can just sit tight and wait for it to go up again.

And I’m confident that bitcoin (and other cryptocurrencies) will still go up in value. We have only begun to scratch the surface of this new type of currency. I believe there is so much more in store and so many other uses for it that will be developed in the future — maybe not necessarily with bitcoin itself but with other cryptocurrencies offering more advanced features like smart contracts and so on.

It used to be that only a small group of geeks understood bitcoin, and that circle eventually grew wider and wider, and it grows wider still up to today when even non-geeks are now interested in investing. Simple economics dictate that when the demand goes high for a commodity of limited supply, it’s price can only go up.

 

Originally published in Sunstar Davao.

Email me at andy@freethinking.me. View previous articles at www.freethinking.me.

Cryptocurrency 101 (Part 3)

Photo Credit: markethive Flickr via Compfight cc

Click here for Part 1

Click here for Part 2

What is blockchain technology and how does it work to provide decentralized transactions?

Blockchain technology is built on 3 key ideas:

  1. Private-Public Key Cryptography
  2. Distributed Networks
  3. Incentivized Computing

Cryptography is the process of writing and reading coded messages. The process of writing it is called encrypting and the process of reading it is called decrypting. In order to properly read and write a message, one needs a key which is the formula to unlock the message.

One of the simplest methods of encryption is direct substitution. An example of this is for you to take a sheet of paper and write the letters A to Z in one long column downwards. On the next column, beside the letter A, start with another letter, for example M, then continue downwards. So you would write N beside B, O beside C, and so on until you get to Z and then you start again at A.

This now is your key.

That means the when you want to write the letter A, you should instead write M. And when you want to write the letter B, you should write N, and so on.

Using this method, the word “apple” will be written as “mbbxq” and the word “balloon” will be written as “nmxxaaz” and so if we write an entire message this way, it will appear as gibberish to someone who does not have the proper key to decode it. Of course, a simple code like this can be broken very easily even by a ten-year old, which is about the age I got interested in this sort of thing.

So one can make a more complex formula, for example a=”45w”, p=”x3e”, l=”ch”, e=”6a” so now the word “apple” will read as “45wx3ex3ech6a” and this will be a more difficult code to break. Modern encryption takes advantage of the power of computers to do very complex calculations and so are many orders of magnitude harder to break than these simple encryption methods.

One of the most popular modern encryption technologies is called the private-public keypair. These keys are typically very long numbers which may look like this: “3048024100C918FACF8DEB2DEFD5FD3789B9E069EA97FC20.” Your private key is yours alone while your public key is the one you give to people you want to transact with. For someone to send you an encoded message, he only needs to know your public key. Once he encodes the message, even he will not be able to decode it, as you will need the private key to do that.

Blockchains use this method to ensure that your transaction is authentic, authorized and secure. In fact, this method is more secure than simply typing a password on a web browser.

Next, the blockchain uses the idea of a distributed network. Most of our transactions use the client-server model wherein the data resides in a central repository. For example, if we are doing online banking, all the data resides in the bank’s servers (and nowhere else). Therefore, if someone would be able to hack that server and modify certain transactions, it would be possible for that person to make a cash transfer of P1,000 to his account appear to be P1,000,000. If he were then able to withdraw that amount before the hack was discovered, then he would have gotten away with free money.

The same thing happened to a local bank several weeks ago where there was an IT glitch which caused some people to see their bank balances suddenly go to zero or negative, while others were surprised to see more money than they should have in their accounts. In fact, some were able to withdraw this excess cash before the glitch was discovered and all machines were taken offline to prevent further damage.

This happened because the transaction records were centralized and any alterations (whether authorized or malicious) to those records will immediately affect the clients accessing those records.

In contrast, cryptocurrency uses a distributed system which essentially has multiple transaction ledgers. Anyone can download and secure a copy of these ledgers. Transactions are recorded in segments called blocks, and these blocks are produced regularly and sequentially — that is why it is called a blockchain.

The software to record transactions and secure the blockchain network is called a “miner” or a “node,” and it is typically open-source and free for anyone to download and run. So anyone who does this will have a complete record of the entire blockchain since the beginning. It’s like having a complete record of all your bank’s transactions on your computer.

So now, there is no central repository of the data, and the integrity of the data can be quickly compared with all the other miners or nodes in the network. For example, if someone were able to hack my computer and change the transactions there, once the program verifies that data with the rest of the network, it will discover that my records are different from the vast majority of other miners and thus will automatically reject those hacks. For a hack to be successful, the hacker must be able to manipulate the records of 51% of all the miners in existence — a feat which is near-impossible for popular cryptocurrencies like bitcoin or ethereum which has thousands and thousands of miners all over the world.

But why would someone want to download and run a miner or node on his computer? We’ll tackle the next key idea, incentivized computing, next week.

 

Originally published in Sunstar Davao.

Email me at andy@freethinking.me. View previous articles at www.freethinking.me.

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