Looking after cryptocurrency demands a different set of responsibilities from investors than traditional assets do. A big problem for old money is trust; financial institutions provide the necessary mechanisms to protect deposits, and the public agrees to give up custody of their savings in return for peace of mind. As the current crisis has shown, this is a real threat to our future financial security. National currencies are being devalued through crisis mitigation while managed funds such as pensions face a dilemma over underfunding.
Going forward, financial independence has to take on a new meaning, where each individual maintains control over their own savings.
For those looking for an alternative asset to invest in, Bitcoin is accessible and attractive but, as an unfamiliar, novel asset class, it can seem incredibly complicated to newcomers. Bitcoin can be owned outright and held in sole custody of its owner, insulating investors from decisions made on their behalf by institutions such as central banks, but also demanding more self-discipline and responsibility.
By following good security practices, Bitcoin is completely safe to invest in and store, and for many investors using Bitcoin promises greater financial independence well into the future, detached from governments and supranational institutions. If you are just starting to think about buying Bitcoin or other cryptocurrencies or related products such as hardware wallet, three golden rules apply: protect your keys, protect your data, and don’t rely on old security conventions such as passwords and 2FA in the age of digital assets.
Money has never been so fragile. Billions of people are forced to trust in government-issued, unbacked currencies, and are made to take on the risk that their savings are properly managed through the events that await us in the coming years.
To offset the risk of purchasing power disappearing overnight, people invest in harder assets like real estate and gold, or assets which provide returns, such as stocks. Over the last ten years, the best hard asset to invest in has been Bitcoin.
Bitcoin is a cryptographically-secured and consensus-driven vessel for long-term storage and transfer of value. Economically, it currently works much the same as gold: it is divisible into tiny fractions, while retaining the same relative value; it is fungible, so one bitcoin is always worth the same as any other, like a gram of gold will always be worth one gram of gold, even if it is a different piece; and it is durable — try as you might, it is almost impossible to destroy gold as it can always be pieced back together and recombined, while Bitcoin cannot be destroyed as long as the ledger exists on some of the many thousands of computers running a node.
Gold is still a very popular investment, with digital contracts in place that allow anyone to buy some without the hassle of holding custody of it. While this is practical, it again circles back to trust. Gold is bulky and inconvenient to store, so people invest in derivatives that represent the gold price, rather than investing in the commodity itself.
Bitcoin is natively portable and can be stored or taken anywhere using just a sheet of paper containing a list of words, so it is much easier to actually own Bitcoin than gold.
As a natively digital currency, Bitcoin will exist as long as there are computers (nodes) hosting the ledger and miners adding blocks to the blockchain. Storing wealth in Bitcoin means that over ten thousand full nodes will keep a record of how much bitcoin each address holds, and will carry out any transactions the addresses’ key owner wishes to make, without question.
Cryptocurrency assets are safer to purchase than precious metals, as they can be easily verified or identified as counterfeit. Where it takes specialized technology to assess the purity of gold, bitcoin is verifiable simply based on its code.
That means anyone can safely acquire bitcoin, transfer it to a wallet they own the keys to, and know that they are holding the real thing. For many, cryptocurrency will be the only common asset they can hold custody of.
As long as you have your keys and don’t ever share them with anyone, you will always be able to access your crypto. No need to contact a bank, visit a broker, or build a vault to keep gold at home. Bitcoin is one of the few assets that can be owned outright, without making any special accommodations for it.
Since it is a digital asset, however, investors need to be extra cautious not to share details of investments online, as it will make them a target for phishing and social engineering. As long as their keys are kept secure and offline, which hardware wallets like Trezor make straightforward and practical, there is no chance hackers will be able to steal their funds.
Protect yourself from online threats
Making the decision to take control over your finances means answering the question of ‘who controls this asset?’. A gold coin physically held in your hand or stored somewhere only you can access, is a tried-and-tested safety net, but actually using it to pay will be difficult.
The only sensible asset is Bitcoin; some choose to store it like gold by securing a list of recovery seed words in a hidden physical vault, but if they one day enter that list into a compromised computer, they could immediately lose their funds.
Realistically it is safest to hold Bitcoin on a Trezor, where it is protected by a PIN and passphrase, isolating the keys from any malware that may be lurking on the computer and making physical extraction of the keys all but impossible. By using a hardware wallet, the funds are always ready to be used when they are needed and they will never be exposed to anyone else.
Protect your data
The biggest risk to cryptocurrency investors will always be the investors themselves. Our approach to data privacy has been shaped by years of willingly giving up highly sensitive data to poorly secured systems which depend on outdated security such as passwords and SMS authentication.
With Bitcoin, this reckless approach to data privacy and security is made strikingly clear. Social engineering has been a problem for many years, but scams and phishing attacks become especially common around market highs.
Following a massive data breach in the industry last summer, thousands of people received texts and emails that were designed to extract recovery seeds from cryptocurrency investors. This was fuelled by the fact that so many customers had willingly given identifying information including contact details and their actual home addresses.
As long as their funds were secured in a wallet, they had nothing to worry about, but many fell victim to the fake messages and entered their recovery seeds on the attackers’ spoofed web pages. Those who did will have lost all of their funds almost instantaneously, while if they had done nothing — or at least confirmed the message was genuine — their funds would have remained completely safe.
The lesson to learn from this event is that, no matter what product you are buying, the seller is generally passing your information to a string of third party service partners, such as delivery fulfillment companies and accounting tools. The only way to protect your sensitive data is to never provide it. It takes seconds to create a new email account, while you can use physical drop-off points for delivery of important purchases such as hardware wallets. Many countries offer these services free of charge, but even a small fee is worth paying to avoid exposing your home address.
At Trezor, we overwrite customer data after 90 days from the date of purchase. This means that the risk to our customers is minimized, but it will always be safer to use pseudonyms and purpose-specific inboxes and to never give away your address online.
The paranoia that parents experienced during the boom of instant messengers has all but subsided, just as those lessons become needed more than ever. Any data willingly given out on the internet will almost certainly, sooner or later, be leaked. Be data-conscious and you will be able to protect yourself and your investments for decades to come.
Consumer investment in the 21st century has largely been conducted through third parties, who have inflated the notional value of derivatives markets to somewhere between $500 trillion and one quadrillion dollars. The World Economic Forum envisions a future in which the concept of ownership no longer exists, yet the heavy-handed response of the US Federal Reserve to the COVID-19 pandemic — diluting money supply by printing over 20% of the entire USD supply in just one year — should raise alarm bells about the idea that a government can be trusted to secure your future wealth.
Ownership will be vital in the future. A flood of millennial buyers entered the real estate market during 2020, capitalizing on low lending rates to avoid rising rent prices in all major global hubs. As rates return to pre-COVID levels, those who missed the opportunity will look for ways to secure themselves against the tides of inflation and global crises. Owning Bitcoin, an asset which can not be censored or seized, will be an essential hedge against monetary policies that suppress the ability for ordinary citizens to accumulate wealth.
Cryptocurrencies are unlike any asset that came before them. While they are entirely digital and only exist online, their keys can be isolated in a hardware wallet, and their recovery seeds should only ever exist physically, on paper, metal or any other robust substance. By creating a gap between your keys and the online asset, online attacks are mitigated. This is great, but it comes at a time when data security of the general population is in a terrible state, making it very easy to manipulate the human behind the wallet. If investors take data protection seriously, their crypto will be secured long into the future, without having to trust anyone with their money.