Scams, hacking and cryptocurrency exchanges going bankrupt have plagued the cryptocurrency community and have spooked investors in 2017. The picture for 2018 probably won’t change too much. Many traders using our services at ewminteractive.com have been interested in trading bitcoin, ethereum, ripple and other altcoins so we decided to find out how they can protect themselves from some of the risks in the digital currency world.
Let’s just start with a little definition of what the word “safe” means in this article. Here we’ll use it to describe something that:
- lets you have indirect access to cryptocurrency markets
- is hard to hack (but not impossible)
- or something that has the smallest possible chance of being a scam
We also don’t use it to say you can’t have a losing investment or position. You most definitely can and should trade and/or invest accordingly.
Now that we’ve cleared that up, here they are:
TIP #1: USE A TRADITIONAL BROKERAGE THAT OFFERS CFD’S ON CRYPTOS
What’s a CFD? It stands for Contract For Difference and allows you to profit or lose from price movements on financial instruments (like currencies, stocks, indexes, oil, gold, etc.) that you do not directly own.
A less fancy way of putting it is to say that you can bet on where the price will go, just like in gambling where you don’t need to own a team or a boxer to bet on their success or failure.
So this is an indirect way of profiting from predictions on the price of bitcoin and the rest without actually owning them. There is no way that they can be stolen from you or that you can lose your access to them simply because you don’t have any.
Some brokers in Europe are already offering CFD’s on up to 15 cryptocurrencies but there is a negative side to this. Traditional European brokers let you trade on leverage (and might not even offer non-leverage trading), whereas in the U.S. it’s largely banned.
Leverage means you can borrow money from the broker to buy or sell bitcoin, gold, the dollar, for larger sums than your deposit. This allows you to make larger profits if you get things right but it also means that you will incur larger losses than your deposit. Additional little caveats like spreads, stopping trade at their choosing, slower price quotes, fees for keeping your positions open, can also come into play and make this a bad choice despite the lower risk.TIP #2: INVEST IN BITCOIN ETFs OR FUTURES
Another indirect way to replicate the performance of a cryptocurrency is by owning a trust that invests in bitcoins. This trust is traded on a public exchange as a listed security making it as safe as can be.
There can be ETFs (Exchange Traded Funds) or other ETPs (Exchange Traded Products) that follow the performance of bitcoin and rise and fall with it (we don’t know of any that are focused on other currencies right now). There’s no risk in terms of hacking, losing your private key or address, or being scammed.
There are several cons to this alternative and the main one is that there could be a difference in the price of the ETF or other product and the underlying asset. In other words bitcoin might continue growing but what your balance could drop because of the way the portfolio is constructed or even because of high fees.
The two futures currently being traded are XBT on the Cboe and BTC on the CME and when you trade them you could also see a significant difference in the bid and ask prices making it hard to obtain a profit, especially in the short-term. But if you do choose this option you can access it through stock brokers like TD Ameritrade, Interactive Brokers, E*Trade, Fidelity, Charles Schwab and TradeStation.
TIP #3: USE SOFTWARE CRYPTOCURRENCY WALLETS
Why? Because cryptocurrency exchanges can get hacked, go bankrupt or they could get hit by a glitch. Either way you get dragged down with them.
A software crypto wallet allows you to essentially hold your own private and public keys and interacts with blockhains. This allows users to send and receive their digital currency and check their balance. So you’re not storing the bitcoins, ethereums and ripples (we love saying ripples) but you’re rather keeping private the way to access them. A bit different than a physical wallet with money in it, so don’t get confused.
There are three types of software wallets.
- The first one is a desktop wallet that is downloaded to a laptop or PC and can be accessed only from that computer. This type offers one of the highest security levels but if your computer is hacked you could also lose your coins.
- A mobile wallet is essentially the same but runs on your phone through an app and gives you the same advantages like the phone does compared to a laptop – mobility and ease of use on the go. They are also smaller and more user-friendly from what we’ve seen so far.
- Online wallets – they run on the cloud and can be accessed from both laptops and phones. This makes them the easiest to use but at the same time they are still operated by a company that keeps your private keys online. Which increases the likelihood of foul play – either a hack or someone from the company taking advantage of their position.
Here are some good crypto wallets that we’ve come across over the last several months, although we have to say that most are focused on a single currency, so keep that in mind: Jaxx, Electrum, Mycelium.
TIP #4 – USE HARDWARE AND/OR PAPER WALLETS
- Hardware wallets store the private key of a user on a device very similar to a USB. They are stored offline and make transactions online, limiting their exposure and increasing security. They can be compatible with different online interfaces and support various currencies. The user just has to plug the device to a computer or phone, enter their pin and make their transaction. Then you just unplug and keep your coins out of harm’s way. Perfect for long term safekeeping.
- Paper wallets don’t necessarily mean that you’ve copied or printed your public and private keys on a piece of paper but that is also an option if you prefer it. But in general they refer to software that generates the public and private keys which can then be printed, written down in a file or indeed on paper.
To make a transaction you need to simply transfer funds from your software wallet to the public address that is kept on your paper wallet. And vice versa.
We’ve got some popular ones over here -> Nano Ledger S (hardware), Trezor (hardware), myetherwallet.com (paper), bitaddress.org (paper)
And that’s about it, let us know if you have any questions in the comments and if you’re interested in how Elliott Wave works in predicting how bitcoin and the rest are going to behave over the next days, weeks and months check out our premium analyses.