Crypto Assets, Treasure Maps And The Wild West
Decentralized, censorship resistant trust governed by the technical protocols embodied in Bitcoin’s open blockchain is impacting the way we share data, conduct business and define our place in the world.
To increase my understanding of the brave new world of decentralized trust, I have been exploring the Bitcoin and the crypto currency/crypto asset universe to understand their potential as investments and how their underlying models can impact society and technology. For the uninitiated, it is an intimidating space populated with miners, exchanges, wallets, traders, hard forks and lightly regulated crypto token startups known as ICOs
As an information technology professional who has worked on the development of a variety of software products at both Amazon and Microsoft, I find it interesting observing crypto currency’s transition out of a tech savvy early adopter phase. The phase we are now entering is one where mainstream investors and institutions are starting to include crypto currencies as part of their investment strategy. This phase of adoption is driving a scenario in which non-technical investors now need substantial technical know-how to help them decide how to secure their (hopefully!) very valuable crypto investments.
MY CRYPTO CURRENCY USER EXPERIENCE
The User Experience (UX) enabling customers to own, buy and sell crypto currencies via well-known exchanges like Coinbase and GDAX has been designed for technically savvy users. These technical users understand concepts like private keys for signing transactions, how to securely manage private keys and how to transfer crypto currency value to the different ‘wallets’ that they control. Understanding these concepts is important for investors because controlling the private key associated with a crypto currency transaction means you control the ownership of that transaction’s crypto asset (i.e. an amount of Bitcoin).
Controlling a private key in the crypto currency world is the equivalent of holding a $20 bill in your hand; you then control the 20 dollars of value associated with that bill. It is important to understand that if a malicious person steals the private key that was used to sign transactions on a crypto asset’s ledger (aka the blockchain), they now own the crypto assets signed with that stolen key. So, investors now need to plan for how they will secure those private keys.
As part of the process of understanding how to manage my own portfolio of crypto currencies, it became apparent that I needed to create a personal security plan. The need for defining a personal security plan was confusing to me, given my experience with securing money looked something like this:
I deposit money in my bank account, the bank is responsible for keeping my money safe. If my money was stolen from the bank (via bank robbers, hackers, embezzlement, etc.), the bank would replace the stolen money via FDIC insurance or some other mechanism. Hence, if I deposit money in a bank, it is “secure” and there is nothing else for me to worry about. If I have any reason to distrust the security of the bank and choose to not deposit my money there, it would be my responsibility to keep those assets hidden, safe and secured.
Now when securing my crypto currencies, I have to decide if I am comfortable letting a crypto exchange control the private keys that determine the ownership of currencies or if I am willing to be responsible for controlling the private keys myself. My initial tendency was to let an exchange control my crypto currency. That seems to be the easiest thing to do and it is similar to how I do banking today.
IMMATURE GOVERNANCE, HACKERS AND THE WILD WEST
When making the choice of whether to let an exchange control the private keys for your crypto currency or whether to control and secure the keys yourself, it is important to recognize that crypto currency exchanges are in an immature state of security, governance and regulation when compared to today’s mainstream financial institutions. In fact, today’s crypto currency environment is considered by many to be the “Wild West” when it comes to risk from the loss or theft of your crypto currencies. Even the most secure and respected exchanges are subject to risk of loss or theft (see blockchain graveyard), so it is important to fully consider your options when creating a personal security plan.
The stereotypical “Wild West” banking scenario: a one-horse town, a sheriff, and a bank whose security is easily defeated by robbers blowing up the safe with sticks of dynamite. Those in the Wild West who did not trust the town bank buried their cash and created elaborate treasure maps describing how to find it. In either case, a bank robbery or a lost treasure map, means unrecoverable assets with no recourse for getting the assets back. There was no FDIC insurance or elaborate home security environments back then to help protect your money.
SECURITY PLANNING FOR YOUR CRYPTO ASSETS
Bitcoin and blockchain technologies come from the software engineering / cryptography world. The denizens of this world are comfortable with technical complexity and have a high degree of paranoia regarding how malicious people can steal digital assets like crypto currencies.
Today’s tech savvy investors are comfortable making security tradeoffs between quick access using online wallet(s) for small purchases / trading vs. directly controlling the keys in an offline wallet for their asset’s safety and security. However, investors who do not have a technical background now have to make complex security choices for their crypto currencies, akin to “money safety” choices made during the days of the Wild West. The basic choices are:
- Trust exchanges (i.e. “banks”) whose inherent risks for how to securely control and retrieve crypto currencies include:
a) security holes in their technology/facilities/operations
b) dishonest people who are willing to confiscate your crypto currencies for themselves
c) assets subject to ‘asset locks’ on exchanges for varying regulatory or business reasons.
2. Create a personal security plan (i.e. your “treasure map”) whose inherent risks for how to securely control and retrieve crypto currencies include:
a) Forgetting the location of your private leys or how to retrieve the keys from a device
b) Losing a device that contains your private keys (a laptop, phone, hardware wallet)
c) Theft of devices or the actual private key data
These are tricky choices for a neophyte to make when planning the security of their own crypto currency portfolio. To help you understand the tradeoffs you need to make when creating a personal crypto security plan follow these steps:
1. Determine the control/security/accessibility tradeoffs for any crypto currencies that you plan on owning. For example, you might want to keep a percentage of Bitcoin in an online wallet for making purchases or trading — the rest of your Bitcoin holdings are kept offline in ‘cold storage’ to achieve a high level of security for the private keys.
2. Decide on a security approach that you fully understand to make your crypto currencies as safe as possible from theft or loss. Many security approaches are complex and increase the risk of shooting yourself in the foot by using security techniques that are hard to follow.
3. Decide how much you trust the security for any exchange you use. Not all exchanges are equal in reputation and operational skill (see Mt Gox).
4. Define the basic steps that will allow you to successfully control and retrieve crypto currencies using your security plan. Do a simple walk through of the steps to assess your plan’s ease of use.
Ultimately, the approach for how you set up your crypto currency security plan depends on understanding your risk tradeoffs and your willingness to investigate security options that work for you. If you are intimidated by technical experimentation, it can be helpful to be part of a local affinity group to help you gain confidence.
Talk to friends and family who have experience in crypto investing, join crypto investing groups via meetup.com, join crypto social media groups on Facebook, look online see what other people do to secure their crypto currencies, etc.
See next article “Options for Securing your Crypto Currency Portfolio”
