There is no doubt that cryptocurrencies are here to stay, and they hold a promising future. However, conventional investors are still afraid of using crypto wallets because of the risk that interplays with this emerging market and the underlying technology.
While it’s true that cryptocurrencies and crypto wallets will always be attractive scammers and fraudsters, especially if you hodl or transact large amounts, history has taught us banks are riskier.
In this article, we will delve into some of the reasons why crypto wallets and cryptocurrencies are risky and why traditional banks are riskier. Let’s dig in.
Risks of using crypto wallets
Note that there are two types of crypto wallets in existence. They include hot wallets and cold wallets. Each comes with its own risks. Therefore, none guarantees the total safety of your crypto coins.
The major difference between the two crypto wallets is that hot wallets are connected to the internet, and cold wallets are not.
When using hot wallets like online/web wallets, mobile wallets, and desktop wallets, some of the risks involved include;
High possibility of hacking attempts and scams
High possibility of downloading viruses
Because hot wallets rely on the internet, they are usually exposed to internet risks.
Worst Crypto hacks
Mt. Gox Hack
Mt. Gox was once the biggest Bitcoin exchange in the world. Launched in 2010 and based in Shibuya Tokyo Japan, the exchange faced a series of undercover attacks between 2011 and 2014. The attacks cost the exchange and private users close to 850,000BTC, which was worth around $460 million back then. As of 2019, the stolen Bitcoin would be worth $6.12 billion.
NiceHash, a Slovenian Bitcoin mining platform, was attacked by hackers in 2017 who stole 4,700 BTC, which amounted to about $64 million at the time.
Bitstamp is another Slovenian Bitcoin exchange startup that was founded way back in 2011 as an alternative to Mt. Gox. However, just like Mt.Gox, the exchange was hacked in 2015 by anonymous hackers who made away with 19,000BTCS worth $5 million at the time.
On the other hand, some of the risks involved when using cold wallets like Trezor, Ledger, CoolWallet, and Keepkey include:
Possibility of the hardware device getting damaged, lost or stolen
Imperfect implementation of the hardware device could allow hackers to gain access to your crypto coins
The compromised production or shipping process of the hardware device could result in loopholes that hackers might use to gain unauthorized access to personal information.
Risks of using cryptocurrencies
Although cryptocurrencies have the full backing of blockchain, which offers impeccable security levels, they are not without risks. Some of the risks involved when using cryptocurrencies include;
Instability of value: The high volatile nature of cryptocurrencies makes them quite unstable. Their value keeps changing out of the blue, making them a highly risky investment venture.
Transaction errors: It is highly possible to send crypto coins to the wrong wallet, especially if you are not keen on what you are doing. The wrong transaction details mean you could lose thousands in a single transaction without any recourse.
Theft and scams: The crypto space has, for the longest time, been highly unregulated. This means the market is susceptible to lots of fraudulent activities. And because transactions rely on the internet, hacking attempts are not uncommon.
Compliance risks: Not all countries in the world have openly welcomed the use of cryptocurrencies.
As you can see, cryptocurrencies and crypto wallets have several risks that make people shy away from them. Nonetheless millions of people use crypto wallets and cryptocurrencies as can be seen in the graph below.
However, compared to traditional banking, which is riskier?
Risks of using traditional banks
One of the major risks of using traditional banks is exposure to illegal activities. For the longest time, traditional banks have faced a lot of criticism because of many illegal activities like fraud, scams, and money laundering, which has left many people penniless.
Examples of Scams by Big banks
Wells Fargo Fake-Account Scandal
In September 2016, the federal bank regulators revealed that Wells Fargo employees had secretly created millions offraudulent savings and checking accounts on behalf of customers without their consent. The bank was hit with a $185 million fine.
As ofJanuary 2020, John Stumpf the former CEO of Wells Fargo has been banned for life from banking and ordered to pay a $17.5 million fine for his involvement in the scandal.
Australian Banks fee-for-no-service scandal
In Australia,four of the nation’s largest banks, Commonwealth Bank of Australia (CBA), Westpac Banking Corp (WBC), Australian and New Zealand Banking Group (ANZ) and National Australia Bank (NAB), have been accused of improperly collecting fees for services they never provided. The banks would have to return as much as AUS$ 1 billion as well as face criminal charges for their behavior.
Gold and Silver Price fixing
In2016 Deutsche bank agreed to pay $60 million to settle the US gold price-fixing case. The German bank also paid $38 million to settle similar litigation over alleged silver price manipulation.
However, the bank was not the only one to be sued by investors. Other banks to be sued by investors included Barclays Plc, Bank of Nova Scotia, HSBC Holdings Plc and Societe Generale.
Besides the risk of illegal activities, traditional banks also come with market risks that can be financially detrimental. Banks like Lehman Brothers and Washington Mutual went bankrupt because of wrong financial strategies.
Evidently, one of the main reasons why traditional banks are riskier when compared to crypto wallets and cryptocurrencies is the human factor.
Most of the illegal dealings that have plagued traditional banks are due to the manipulation of documents and data, which with blockchain’s immutability capability, is highly impossible.
With cryptocurrencies and crypto wallets, individuals also get benefit from transparency that promotes credibility. It is quite hard for anyone to mess with any financial transaction without anyone knowing. There is also automation that reduces much involvement of people in the transaction processes.
Other benefits that come with crypto wallets and cryptocurrencies include trustless transactions that eliminate intermediary vulnerabilities and decentralization that eliminates a single point of failure.
It is no secret that new technology always faces some opposition before it is accepted. The same applies to cryptocurrencies and crypto-wallets. However, when compared to traditional banks, crypto wallets and cryptocurrencies offer a safer option of transaction.
The elimination of third party reliance and introduction of automation makes the digital coins a safe bet for financial transactions and crypto wallets a safe storage option. If the case of Wells Fargo is anything to go by, then manual financial systems and institutions leave a lot to be desired.
Besides transferring funds across borders without middle-mans, using cryptocurrencies open business to an entirely new customer base around the world. There are many reasons why companies should adopt cryptocurrencies, however many just do not know how to do so.
As a business owner, you may have been thinking about implementing cryptocurrencies as a method payment and a way to accept payment in your company. You are not alone in this, as accepting cryptocurrencies as a payment method is becoming more and more common. Despite this, there are still a number of inherent risks involved in adopting cryptocurrencies and it would be prudent to make yourself aware of these risks and how to put the best control measures in place to ensure that you are protecting your own interests and the interests of your clients.
The opinion on cryptocurrencies and their viability as an option in business have slowly been trending in a better direction since their initial explosion in popularity in 2017. The severe crackdown imposed by numerous world governments has slowly begun to soften and as a consequence, there are more businesses than ever that are accepting cryptocurrency in their business, especially Bitcoin.
Despite the warmer approach to digital currencies, many business owners are still wary about the volatility and risks that cryptocurrencies can pose to their business and their clients. They want their customers paying in cryptos and to buy with cryptos in a safe manner. Yet, many business owners do not know how to do so.
The Rise Of Businesses Wanting To Accept Cryptos
More businesses than ever before are accepting payment in cryptocurrencies and some of the businesses doing so are names that you will likely be familiar with. For example, the German division of Burger King, Starbucks, UK-based food delivery service OrderTakeaway and Richard Branson’s Virgin Galactic among the many beginning to adopt virtual currencies. In fact, there are hundreds of retailers that are following the trend.
There are a number of reasons why companies are starting to adopt cryptocurrencies. Firstly, for businesses that are involved in foreign trade, they are able to transfer currency across borders without a middle-man, this means that they are able to avoid expensive transfer fees, which leads to more retained profits for each sale. Furthermore, money can be transferred across a blockchain close to instantly, whereas with the traditional banking model it can take days for funds to clear.
Being open to using cryptocurrencies also allows businesses to open themselves up to an entirely new customer base. By advertising the acceptance of cryptocurrencies, businesses can make themselves available to customers in different countries by diminishing the cost associated with serving cross-border customers. Finally, sensitive data that is transmitted over a blockchain, such as payment information is stored under lock and key and is protected from nefarious agents, meaning that the potential for customers to be defrauded is incredibly minuscule. This can also be a big selling point for customers that do not like the idea of banks keeping tabs on their every move and every transaction that they make.
The Risks Involved In Adopting Cryptos
One of the first risks associated with a business accepting the use of cryptocurrencies is the price volatility that comes from cryptocurrencies. Whilst investors can benefit from cryptocurrency price volatility, a business may accept payment in cryptocurrency and by the time they convert the payment into fiat currency, the cryptocurrency may devalue significantly, leading to an unprofitable transaction for the business. Businesses can take some precautions against cryptocurrency volatility, although because no transaction is actually instantaneous, completely eliminating the risks is essentially impossible.
One of the second risks involved in adopting cryptocurrencies comes from the way in which they need to be stored. Your cryptocurrency holdings are only as safe as the crypto wallet that you use to store them and cyberattacks can leave your holdings totally drained.
Limited regulation and the freedom afforded by cryptocurrencies is one of the major selling points, however, the limited regulation poses a question of reliability. If you are not comfortable with the potential for loss, even if it is a small chance, you may be better off waiting until you feel that your business could viably withstand such an event.
How To Mitigate The Risks of Accepting Cryptocurrencies?
One of the first ways to mitigate the risks involved in accepting and paying in cryptocurrencies would be to arm yourself with a cryptocurrency wallet that has high levels of security. There are a number of wallets on the marketplace that have high-quality security and this will go a long way towards preventing you from falling afoul of criminal actors stealing your cryptocurrency holdings.
One of the ways in which businesses can mitigate the risk of price volatility with cryptocurrencies would be to store your cryptocurrencies and make payments by utilizing stablecoins, which have been specifically created to ensure price stability. This will prevent the aforementioned issue of a price drop turning a profitable transaction into a transaction that operates at a loss. Another solution to this problem would be to convert any cryptocurrency received into fiat currency as soon as it is received, to minimize the possibility of a price drop before the conversion is made.
Finally, to combat the issues of reliability and limited regulation, you will need to do a lot of research into how cryptocurrencies are viewed in your locality. From this information, you will be able to ascertain whether or not it is practicable to accept cryptocurrencies in your company. Furthermore, from your research, you will be able to identify the cryptocurrency that is best suited to your needs, there are thousands of cryptocurrencies in circulation at this point and only a number of them will be perfectly suited to your company.
As the world has experienced a technological boom that has changed the way we do the majority of the things in our lives, it is only natural that in this modern era, the way we transfer life’s most useful commodity, money would also change.
Despite this, even now, transferring money between locations can be difficult, especially if you are transferring money between countries. A number of different factors contribute to this, especially lack of technological infrastructure, the remoteness of your location and restrictive legislation and procedures. The rapid rise of cryptocurrencies since the major boom in 2017 has propelled virtual currencies into the limelight as a potential solution to the problems that normally arise as a result of transferring money digitally in our current system. Due to the fact that cryptocurrencies are still in their infancy, there is much debate about the validity of such speculation.
Why Where You Live Matters For Money Transfers
Location plays a huge role in the quality and the costs involved in transferring money between countries.
One of the reasons for this is because money transfer fees vary greatly from provider to provider; in a country where there are a lot of different banks and services to choose from, the customer has the freedom to find the cheapest rates, whereas in less developed areas the choice of provider is going to be much more limited, relegating customers to a select few options that may not be providing them with a good deal.
Your location will also have an impact on the convenience of services available to customers. This is because of the fact that in certain countries, a large number of people do not have bank accounts, in fact in Senegal only 181 people have a bank account per thousand.
This means that they will need to physically collect money that has been sent to them. In more remote locations, this can be a major inconvenience to customers due to the travel involved.
Do Cryptocurrencies Aid in Money Transfers?
The main problems that plague the money transfer industry are the regulations, the overwhelming number of “middle-men” and high commission fees. For example, fees have been so prominent that in 2017, migrants had sent $450 Billion back to their home country, with $32 Billion being claimed by providers as transaction fees.
This has severely hampered people’s access to the global financial system, with 40% of people saying that they have no access at all, primarily due to the expenses involved.
One of the ways in which experts suggest cryptocurrencies could improve the money transfer market for customers is by cutting down the costs of transferring money.
The cost of remittance on a cryptocurrency transaction can be either hundreds or thousands of times cheaper for customers, making it easier and more cost-effective for people to transfer money. Despite all of the public support for cryptocurrencies in this aspect, there are still very influential members of the community that believe that the effect of cryptocurrencies on the transfer of money is going to be minimal, at least in the short-term.
One of the main problems touted by experts is that foreign exchange rates will be incredibly volatile due to the nature of cryptocurrencies, meaning the value of a transaction can fluctuate massively, even whilst it is in progress. This represents the potential for customers to lose money. Furthermore, another issue that is commonly explored is that there are some that believe that the process of transferring money through cryptocurrencies creates friction for the customer, especially in a market such as money transfer where the ease of the customer’s experience is a huge USP.
The issues stem from the process of converting fiat money to cryptocurrencies, transferring to the recipient’s wallet and then converting the funds back into fiat currency.
Is There An Ideal Solution?
For cryptocurrencies to successfully become the driver for global financial change that some experts believe it can be, there are a number of issues that businesses will need to find solutions to.
One possible solution to the problem of erratic cryptocurrency values reducing the value of a transaction would be to send the money through the form of stablecoins. There are still some concerns over stablecoins that de-value beyond their pegging, although this is not nearly as pronounced as it is in regular cryptocurrencies. The issue of improving the general ease of the user experience is a more complex matter. Solving this problem would require a lot of leg-work and collaboration between customers and coin providers.
To make the process as quick and easy as possible would require some form of infrastructure which would allow for the automatic conversion and deposit of cryptocurrencies into fiat currency.
Even if this was brought into practice, the benefit would not be entirely clear in LEDCs whereby many people do not have bank accounts. To get around this, a cryptocurrency provider may need to specifically create a service dedicated to allowing customers to exchange their cryptocurrencies for fiat currency in branches across the world, which is a very unlikely prospect. As it stands, nobody has found the winning combination to fully integrate cryptocurrency into money transfer services, however, with the infantile nature of the market, you may be pleasantly surprised to see businesses and customers break the barriers in coming years.
The most grievous security breaches in the crypto world come from hacks and when a hack occurs and there are either, a large number of victims, large losses, or both, the media will draw attention to this straight away. Despite this, smaller successful hacks will hardly go reported. In fact, Foley and Lardner have published a report stating that that 71% of the most prominent cryptocurrency traders and investors believe that theft is the biggest risk plaguing the industry.
Be Careful Of Applications on App Stores
There is a larger proportion of Android users falling victim to hacks, due to the fact that their operating system does not use two-factor authentication. Forbes has claimed that due to the open operating system preferred by Android, it makes it less secure than iOS. Hackers have been known to create apps on behalf of cryptocurrency sites on the Google Play Store. The most well-known case of cryptocurrency users experiencing a hack through an app on the Play Store occurred in October 2017. Poloniex is an American cryptocurrency exchanged, which suffered hackers posting a fake app onto the Google App Store, which faked the role of a mobile gateway for the exchange. Traders wrongly downloaded the app and their personal information was stolen, with malware analyst Lukas Stefanko, stating that 5,500 users had been effected before the fake app was removed from the store. How to Avoid This Issue:If you are unsure about the legitimacy of an app, the first thing you should do is visit the website for the project. Usually, from the website, there will be a direct link to a valid app. You should also make sure that two-factor authentication is enabled on your apps, to add another layer of security and should avoid downloading apps that you do not need
During October 2017, an irreparable flaw was discovered in the WiFi-Protected-Access Protocol. It became possible for attackers to use a KRACK attack to cause the user’s mobile device to connect to the hacker’s network. From this, any information that would pass through the WiFI network would be available to the hackers. This includes private keys for cryptocurrency wallets and these risks are most prevalent in high-traffic areas such as railway stations and airports. How to Avoid This Issue:It is never worth it to make a cryptocurrency transaction on a public WiFI network, all it takes is one KRACK attack and you will likely lose your holdings. Just make the safe choice and wait until you are on a secure network. You should also always update the firmware on your router to ensure the best possible security.
Fake websites or site cloning has been a method of attack since the beginning of the internet boom. This method of phishing has remained in popular use in the current age of the internet. One way in which an attacker can do this is by registering a domain that is one letter short of the official address. Hackers will then clone the entire website in the hope that internet users will not notice their error and will put their personal details into the site, allowing the scammers to steal their information. Alternatively, attackers may send an email to cryptocurrency users, perfectly copying the communications sent from official cryptocurrency projects. Within these communications, they will encourage users to click on a link in the text, prompting them to put in their personal details, allowing attackers to steal them. A report by Chainalysis has estimated that $225 Million has been lost as a result of cryptocurrency phishing scams.
How to Avoid This Issue:One of the best ways to avoid this issue altogether is to bookmark the correct websites that you will be regularly visiting, this way you do not need to worry about typing the link incorrectly. You also need to remember that you should never give your personal information to anyone, no legitimate business would ask you for your account details over email.
Cryptojacking is a rapidly expanding problem within the cryptocurrency community, with 2.9 Million instances recorded in the first quarter of 2018, which was a 625% from the final quarter of the previous year according to a report by McAfee. Cryptojacking itself is a type of attack, whereby the attacker will place malware on the victim’s computer, which operates hidden crypto-mining activities on the computer itself. There are some types of cryptojacking malware that can also read the personal information stored on your computer, and as a consequence of this the attacker may not only be able to freeload from a person’s computer, but they can also transfer the victim’s cryptocurrency holding to their own wallet. How to Avoid This Issue:One method of preventing cryptojacking from occurring would be to invest in high-quality antivirus and anti-malware software. Such software would be able to detect any malicious programs and can remove them from your computer. Another prudent measure that you can take would be to avoid downloading software from unverified locations, as these locations carry the greatest risk.
It’s not a guarantee that an add-on designed for your browser is going to be safe. In 2018, the MEGA Google Chrome extension was replaced by hidden malicious code that was said to be able to harvest sensitive information from sites that its users visited. Tens of millions of people downloaded the addon and were put at risk, even though it was initially believed that the risk only pertained to popular sites like Google and Facebook.
The opposite was confirmed when Riccardo Spagni, a Monevo developer confirmed that both Monero and Ethereum private keys could also be harvested by the addon. ZDNet later released a report confirming the damage done by the MEGA extension, which Google pulled from the Chrome repository, stating that Google, Amazon, Github and other organizations had been affected by the breach. How to Avoid This Issue:One of the easiest ways to ensure you are not a victim to dodgy add-ons is to not download a large number of add-ons that you don’t actually need. The less you download, the lower your risk of vulnerability. Furthermore, if you do need to download a browser add-on, you should conduct a bit of due diligence and look around the internet for further information on said add-on before downloading.
Lack of Common Sense
One of the main reasons that people fall victim to thieves, wanting to steal their information is due to carelessness. It must be realized that when handling valuable assets such as cryptocurrencies, you are always going to need to do your due diligence and maintain a high level of alertness. In closing, there are a few other things to consider that will greatly increase the security of your cryptos. Firstly, you should never share your private keys with anyone, no matter the circumstances. Secondly, if you have your private keys in a physical format, you should always keep them in a secure location, such as a safe. You should keep your anti-virus and malware protection up to date to ensure that whilst you are online, you are at minimal risk of falling victim to a cyberattack. Going further from your private keys, you should also never share your personal details with anyone, be careful of hackers posing as cryptocurrency projects through email, as legitimate businesses will never ask for your details in this way.