The word, ‘Blockchain’ has created a big splash in the market. Understanding the fundamentals has presented opportunities of the disruptive innovation. Blockchain, the term defines the shared immutable and decentralized ledger for recoding the history of transactions a group of which are stored as a block.
Question may arise about the consideration of Blockchain, Cryptocurrency and Bitcoin to be the same. The answer is: No, they aren’t the same. They are closely correlated as Blockchain is the technology that has enabled the existence of Bitcoin: the best-known cryptocurrency so far and a digital medium of exchange that uses state-of-the-art encryption techniques to control the creation of monetary units and to verify fund transfers.
How does the cryptocurrency transaction work?
Cryptocurrency is an encrypted decentralized digital currency transferred from one electronic bitcoin wallet to another which has been digitally signed for security purposes. This process is confirmed in a public ledger called the Blockchain via mining where everyone on the network is aware about the transaction and the history of each transaction can be traced back to the point where the bitcoins are produced.
Various perspectives of the issues faced in the cryptocurrency trading
1. Phishing and Spoofing Payment Information
As with the ordinary e-money, cryptocurrency can be phished by directing the user to a phishing website where he can upload his crypto-wallets and enter a password. While spoofing of payment can happen when one tries to accurately copy the wallet address but is replaced by malware as not every user is vigilant to double check a long jumble of characters in the address.
2. Error in User Address
A risk very specific to cryptocurrencies is when an error is made in the address which results into the loss of money. Taking an example of Ethereum money, when the last digits of the address isn’t copied properly, the money will disappear into the air or would be transferred to the exact address but the money multiplied by 256 will be transferred.
3. Loss of a Wallet File
One of the major problems in the cryptocurrencies is the loss or the theft where the user is acquainted to storing his cryptocurrency files on the computers and the files are lost due to hard disk crashes or malware. It is feasible for the advanced users to make a hardcopy of their secret key or purchase USB hardware wallets but the number of such users is small.
4. Insecure ICOs
Investing in cryptocurrency or Blockchain- a type of fundraising can be termed as Initial Coin Offering (ICO). The eventual outcome is to raise an outrageous amount of funds through cryptocurrency with just an Internet connection. There is no risk access mechanism to regulate the cryptocurrency market to track down and de-anonymize a payee on the cryptocurrency market.
5. Hacking of Payment Gateway
The hackers are following a new strategy of convincing the hosting provider that they are the real domain owners and then intercept the cash flows. The classic finance services have fallen prey to such kind of strategies adopted by hackers.
6. Fraud at the Trading Exchange
With the popularity and price rise of bitcoin, many exchanges are coming up to let interested users buy cryptocurrencies. These trading exchange sites store public and private keys of all their users’ wallets with them. A trading exchange provider may find it to be lucrative to run away with all their users’ cryptocurrencies rather than earning only the commission on the trading transactions. However, due to lack of legal and regulatory backup, there is not much that can be done in such cases. Thus, it poses an open risk to all traders.
Precautionary measures that can be taken to avoid issues in cryptocurrency trading
Consider Bitcoin wallet as a program to send, receive, store and monitor bitcoins’ balance, where the wallets monitor bitcoin address on the Blockchain and update their own balance with each transaction. The most important thing that defines a wallet is private key and public key. Receiving bitcoins is possible only by mentioning the public key whereas one needs to mention private key to send the bitcoins. Private key acts as a password to the bitcoin wallet which makes it very secure. The combination of the recipient’s public key and your private key is what makes a cryptocurrency transaction possible. There are secure ways to keep the hackers or malware away from logging your keystrokes through Paper Wallet and Hardware Wallet.
Paper Wallet can be specified as a single key written on a piece of paper used multiple times as a wallet- a secure way of storing bitcoins as they are not exposed to malware. To securely backup paper wallets is quite difficult but can be easily stored in safe deposit boxes for security purpose.
Hardware Wallet can be considered as a special type of bitcoin wallet to securely store the user’s private key. The major advantage of having hardware wallet over standard software wallet is that the private keys are often stored in a protected area of a micro-controlled and cannot be transferred out of the hardware in plain text. Hardware wallet does not allow users to validate the operation on the devices as it doesn’t resemble the open source software. BITLOX the world’s only standalone secure hardware crypto wallet is an example that can be taken into consideration.
According to Gartner, in 5 years a Blockchain based business will be worth $10 billion. Bitcoin and Blockchain technology being widely accepted confirmed the Blockchain to be the base of new businesses. Although there could be few difficulties while trading, taking precautionary measures as stated above, dealing with Bitcoins while using Blockchain technology will help you free up cash, create new forms of value, reduce transaction costs and accelerate the business processes.