I don’t think it needs to be said that by being a participant in the crypto-space, you are prone to various threats. Among that list are the potential of investing in scams and also the risk of losing your assets to an organized hack.
In most cases, if your decision-making process is conducted through logic and rationalization then you probably have nothing to worry about. But even the smartest people can be trapped by the allure of quick profits with some sort of irrational belief that they can exit before all hits the ground. This type of trading with the expectation that you can always find an irrational buyer to pay a higher price for an asset that has no intrinsic value is a part of the greater fool’s theory. Trading like that was ever so evident with the notorious Bitconnect. Even with the majority of players in the industry proclaiming that Bitconnect was an obvious scam, so many people still decided to invest in and trade the Bitconnect token. This is where the whole “guaranteed returns” comes in that fools many people.
With an exploding ICO market, you are going to witness more of these scams. Unfortunately, the scams that have launched degrade the whole ICO space exponentially — partly due to our society’s addiction to virality. There are ways that you can protect yourself from investing in these projects by simply doing some due diligence. A simple checklist when going through an emerging project’s whitepaper is essential. This checklist includes the team, the product, token economics, and the overall market comparatives.
When looking into a certain project’s team, you need to be very detailed in how far you dive into each team member. Make sure that they have the appropriate accounts (LinkedIn, Twitter, Github etc.) and that they actually make a point of communicating with their community. You must also check into their group chats such as Telegram and ask questions. When you ask something, time their responses. If they are active in their own community helping people understand the product and portray transparency, then you understand that they are dedicated to the cause. Also, make sure that they have consistency with their answers. If you ask a question and get different answers from team members, this is a sign that the team is not all on the same page.
If it isn’t obvious enough, the product is the single most important aspect of any emerging technology firm. If the company doesn’t already have a working MVP prior to an ICO, this should be a red flag. It is amazing how many of these companies will scam investors into the idea that they will build something in the future once they get the appropriate funding. They often build a team, which they claim is a “dream team” that can build anything and everything. This is one of the biggest ways to scam individuals — and has been for the longest time! If a prospective project does not have a working model, stay away.
Token economics can be a complicated subject, but there is one aspect that you need to focus on which will determine project confidence — that is the discount structure. ICOs are now creating pre-sale and public sale mechanisms to try and induce an increased level of investment due to perceived incentives. Usually, in pre-sales, investors are incentivized to contribute large sums of money for a specific discount on tokens. If the ICO is allowing 50–80% discount, what kind of confidence do they actually have with their product (that is to say if they even have one)? If you bought a large number of tokens at that kind of discount, you have all the incentives to liquidate your investments right as the token becomes exchangeable. Along with these gross discounts, you need to pay close attention to how the company will allocate their tokens. It is especially critical to look at what percentage of tokens they give their advisors. If the company has a lot of advisors and giving them all 2% allocation there is something wrong. Don’t get me wrong, advisors are an important part of a young company — but they are not worth more than the team members (although they will often convince you otherwise).
Lastly, you need to do your market research to determine how much a certain industry really needs disruption and decentralization. This usually is best to be done by talking to traditional companies in the market and get to know the ins and outs of how that market operates. It is important to note that not every industry needs decentralization — many are more efficient and effective in a centralized structure. This is not a zero-sum game.
Those are the main categories in which one needs to be vigilant when trying to separate the scams from the true projects. Maintaining a checklist on all the projects that you are interested in, in a simple yet critical way for you to stop yourself making wrong decisions.
Scams are one big threat, but another is security. This leads us to a discussion about wallets. There is a plethora of wallets you can use, each with unique characteristics conducive to a variety of use cases. Before we get into the different types of wallets, we need to discuss the mechanisms that make these instruments functional on a consumer level.
The function of a wallet is exactly what the name entails. Wallets are a place for you to store your crypto, away from the exchanges. It acts as your own personal bank account. It is usually recommended that you remove your cryptocurrencies off of the many exchanges as they are HUGE targets for hackers (a lot of money at stake). If you have ever heard about the MT. GOX scandal — you will understand why ($473 million USD of Bitcoin stolen in one heist according to one article by cointelegraph). Essentially, exchanges will store your crypto online in a centralized manner. This makes them incredibly vulnerable!
A wallet works based on the issuance of the private and public keys. A private key is your personal key/signature and is something you need to protect with your life. A public key is mathematically derived from your private key. The public key cannot be reverse engineered to figure out your private key. Essentially the public key is a way for your private key to be authenticated, and your private key is used to sign off a transaction.
There are two main wallet types, Hot and Cold. Both have different use cases and are attractive to different users. Let us begin.
First off, the hot wallet. Hot wallets are “online” meaning your information is running on the company’s servers. As you probably already guessed, there are security issues with these types of wallets. Generally, most of these online options are secure, especially if you do some due diligence on which products you choose to hold your crypto in. The issue with being online is that regardless of how secure people say they are, they still have an increased probability to be hacked.
Hot wallets allow users to easily access their funds for scenarios such as day trading, daily transaction, etc. A word of caution; in the unlikely scenario where your hot wallet is hacked I would advise that you minimize the amount of value you actually have in this type of wallet. Make sure you find a value that you are comfortable with potentially losing in the event of a hack. This value will obviously be different for each individual user, but make sure you consider all the trade-offs in making this decision (opportunity cost).
The two main forms of hot wallets are desktop and mobile. Now both of these versions are intended to be easily accessible, such as when you are day trading on desktop exchanges. Both desktop and mobile interfaces have different security flaws associated with them. Desktops are prone to a variety of viruses that can essentially compromise your wallet and the funds associated with them. Mobile devices are also vulnerable to viruses. My preferences go towards the mobile versions. I find that they are easier to use, and you can easily just scan the QR codes from other wallets, or exchanges to transfer numbers and crypto (this is a lot easier than having to type out the whole code).
Now we can talk about cold storage wallets. Although this is likely the most expensive option, it is also the safest route you can go. A cold storage wallet allows a user to take all their credentials offline, saving them from security threats associated with hot wallets. You essentially have your private keys stored on a USB-type device that will only work once you plug it into your computer. This is a simple, yet safe way for you to be able to store and access your funds. You will need to purchase these devices, and they can be quite expensive — however the price is worth it, as the device is essentially your ‘safe’ where you are storing your valuables.
Another form of a cold wallet is a paper wallet. As the name states, this is a wallet that is made out of paper. All the information you need about your accounts will be printed out on a piece of paper. This does give you an extra security feature of being offline. Now, although you do get the offline capability, this is still a wallet that is made out of paper! What happens if you spill coffee on it? Or it accidentally gets recycled, or you end up losing it? I honestly don’t recommend the paper wallet route to anyone. Unless you are a very cautious person, this probably isn’t a viable option. Even the psychology of having all your money stored on a single piece of paper is unnerving. Unlike with paper wallets, typical hardware wallets tend to have back up safety mechanisms that allow you to recoup your digital assets in the event that your wallet is lost, stolen, or broken.
At the end of the day, you will pick the wallet that suits you best. It is important to take your crypto investing/assets seriously. This is a new market with very early technology. You should always do your own research and ensure that you are protecting yourself in the best way possible. At the end of the day, you are spending your money, and investing into crypto at your own risk.
Make sure that you do your own research on the projects that you are curious about. Don’t cut any corners, because at the end of the day it is your money that is at risk. Don’t cheap out when it comes to wallets, as this could be a small investment that saves you lots of money in the event of a security attack or disaster.