Cryptocurrency Cold Storage

Good read compiled from a few sites:

What is Cold Storage in Cryptocurrency (aka Cold Wallets)

Some of you might know that if you hold your private keys, then only you own your crypto coins. If you don’t own your key, then you don’t “own” your coins. (See our post on Bitcoin Private Keys.)

  • It’s important to store your digital assets such as BTC, ETH, or LTC away from exchanges and hosted wallets. If you are not doing this, you are at risk of losing all of your coins in an instant.

Exchanges and third-party wallets hold your private keys on your behalf. This is a big risk because if something goes wrong with their servers, or if they are hacked, then your coins are gone.  If you use a hold your cryptocurrencies via a third-party wallet, you need to understand their policies and procedures for safety of crypto assets, any insurance and guarantees.

If you are not actively trading your cryptoassets via an exchange, don’t store your coins for more than 1-2 days with any hosted or third-party service.  Make use of the “cold storage” tools your wallet providers makes available.

Which brings us to the million dollar question:

  • Where should you keep your cryptocurrencies?
  • Which wallets/methods are the most reliable?

Cold storage (aka cold wallets) means generating and storing the crypto coin’s private keys in an offline environment, away from the internet.

The online environment is very vulnerable to hacking, as we keep seeing how ransomware extorts many people around the world. Also, we can never forget the Mt.Gox incident.  So to avoid such situations, it is essential that you keep your coins safe in an offline manner.  Luckily, the cryptocurrency space has matured a bit, and there are enough cold storage options available.

Some of the most cold storage options are:

Paper Wallets 

A paper wallet is the cheapest form of cold wallets available.  It is free to use and contains a pair of private/public keys printed on a piece of paper.  In this method of storing, your private keys are generated offline so you need not worry about security. And once your transfer the coins to paper wallet’s public address, you are safe.  For different cryptocurrencies, there are different paper wallet clients available. You can make any number of paper wallets whenever required using these clients.

How To Make A Bitcoin Paper Wallet

Cryptocurrency Hardware Wallets (safest)

Hardware wallets are the most robust cold storage option for cryptocurrencies. However, this robustness comes with a price tag.

A hardware wallet is an electronic device. It signs transactions through the private keys which are stored offline. It also allows you to recover your funds using a backup seed key if the device is damaged or lost.  Since most of these hardware wallets have a waiting period of a month or two due to huge demand, you should order one as soon as possible.  If you are looking for a single recommendation as the best Bitcoin hardware wallet, then you should look no further than the Ledger Nano S.

At the time of writing this article, there has been no reported theft or loss from using hardware wallets.

Storing Cryptocurrency in USB Drive (Not so safe)

Using a USB drive as a cold wallet is one of the easiest ways to cold store your coins.

With this, you can export and save your private keys on the USB drive.

But this choice comes with its trade-offs, as anyone with access to your USB has access to your crypto coins. More over, hardware failures are common with USB.

Cold Storage Providers

Cold Storage Providers are companies that connect to your wallet and exchange provider, and allow you to pull your cryptoassets offline.  They can be used to export files of encrypted private keys in an offline environment.

In these pieces of software, the private keys are stored offline on servers controlled by the Cold Storage Provider. The cryptoassets are stored offline and can not be hacked except while during the transfer of funds to and from the Cold Storage Provider.  Most Cold Storage Providers work directly with the Crypto Wallet and Exchange companies.  The downside to their offline protection is that it normally takes 48 hours and double verification of request to return the cryptoassets to the Wallet or Exchange and then onto the end owner.

 

 

The Flag

The Flag of the United States of America is a symbol of American ideals.  To me the following sentence from the Declaration of Independence covers a lot of what the Flag represents:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

In no way does the current actions being taken by professional athletes go against what the Flag stands for.  To me, the mind-numbingly stupid and purposefully provocative statements by Donald Trump goes against what the Flag means and what it means to lead.

 

Chinese Regulators vs US Regulators – Digital Asset version

After reading the Bloomberg piece that China plans to block cryptocurrencies from being traded on exchanges but not via OTC, I wanted to know why Chinese regulators and US regulators have such opposing views.

In the US, the Commodity Futures Trading Commission (“CFTC”) and the National Futures Association (“NFA”) have worked hard to eliminate OTC trading in favor of exchange-based trading.  Even the markets that remain available to be traded OTC now have to report all their client and trade data to a centralized clearing entity.  And now we hear that in China the regulator will allow for OTC trading but not allow the exchanges to offer cryptocurrencies.

I am going to use inductive reasoning here which I normally despise, but I do not have the underlying facts from the Chinese regulators to build a case for allowing OTC trading.

Cryptocurrency (or digital assets) are not regulated by any major economy regulator because the knowledge is not within the walls of the regulators to understand cryptocurrencies and to therefore make any rules about them.  Additionally I would add that a significant aspect to cryptocurrencies is that they are intended to be un-regulatable; the inventor(s) of Bitcoin were specific in their desire to create something that was above sovereign regulation.

I suspect that in China the regulators have a better grip on controlling the OTC brokerages (though my experiences operating in the FX industry for the last 10 years including partnerships with significant Chines OTC brokers tells me otherwise), than on cryptocurrency exchanges.  And what we have seen in the crypto space is the vulnerability of exchanges; even large ones like Mt Gox and even Bitfinex.  Whereas Chinese OTC brokerage firms have at least been around for a number of years and are pretty savvy when it comes to security of data.  I just searched for news on security breaches and missing funds at Chinese OTC brokerage firms on a number of industry portals and found nothing.

So even though one country is pushing cryptocurrency flow into the OTC brokers, and the other is pushing all OTC trading onto exchanges, the goals of the regulators is the same.  Get the trading into a place where they have a level of understanding and control.

ICO vs ico

Filecoin just completed their almost month-long ICO yesterday and raised a total of $257 million, including $52 mio from prominent VC firms Union Square Ventures, Andreeson Horowitz, and Sequoia Capital.  Coindesk.com has a great article on the process and players here.

As someone interested in the trading of crypto-currencies, what I took from this process is the ICO vs. ico aspect.  Filecoin is an “ICO” to me.  A growing firm based on a market-validated concept that already has clients and is successfully attacking a definable and known marketplace.  They have a product, they have product fit, they have clients, it is reasonable to think they need capital to rapidly expand and do their best to corner the market.  As we have seen in the last 20 years, market dominance is possible and incredibly profitable (AMZN, GOOG, FB).

An “ico” to me is an idea that may or not become a product or service that is seeking to raise money from speculators.  We have seen lots of ico’s in the last 8 months and I believe many ico’s are promoted by financial fraudsters who are unlikely to be able to see their idea through to successful product and who know that to be true.

So as my colleagues and I seek to determine which crypto-currencies we will add to our platforms, and support via market-making liquidity provision, we look to not just the initial hype, but to the product fit of the underlying promise.  We continue to get approached to add ico’s to our platforms and liquidity pool.  We are offered pretty healthy “fees” for doing so.  But that is not good for our clients and therefore not good for us.  Crypto-currencies are here to stay and we will be too.

PS – found this Forbes article just as I was finishing this post.  Good read and corollary to my post.

The Massively Geometric Sales Comp Plan

Tomasz Tunguz of Redpoint Ventures has a post about different type of Sales compensation plans for start ups.  It got me thinking about a discussion I recently had with a very early stage company.

Interesting SaaS offering; selling into an industry that has a lot of catch up to do re: technology.  We were discussing what compensation they would give to whomever they hired as their early VP Sales.  Their goal was to offer no salary to the VP Sales; just a very strong commission plan.  Hmmmmm.

I asked what revenue numbers they thought they needed to get to their A round of financing.  Their answer was that they were not worried about revenues; just users.  I get that for B2C platforms, but this was the first time I had heard of it for a B2B platform.  The offering was going out at $1,000/annum per seat license.  My math was that their median client would take 9 seat licenses.  That’s $9,000/annum per client.

Since they stated they were not worried about revenues, I asked if the VP Sales could keep 100% revenues generated for the first clients.  The answer was, “Yes.”  They thought valid first year OTE for the VP Sales was $180,000, and second year was $360,000.

What they decided to offer their chosen candidate (who knew of the “zero salary” mindset) was the following:  100% commission on Gross Sales up to $90,000, then 20% commissions above $90,000 in revenues generated.  So $540,000 Gross Revenues gets the VP Sales to her OTE in Year 1.  $1,440,000 Gross Revenues in Year 2.

When viewed on Tomasz Tunguz chart this would be an extremely steep-sloping line that would melt the chart.  I do not know if their chosen candidate took the offer and/or what the comp plan was.  But I am intrigued to see which type of personality would take on that role and comp plan.

Raise Your Standards

I’ve got this route I run that is half woods and half roads.  I do not know exactly how far the route is.  I do not know if I am running it quickly or slowly.  I do not know who’s property I am passing through on the well-trodden path along the banks of the Charles river.  I do not know much about this route except that I track my time each time I run it.  And my sole goal each time is to improve my time.  I do not always improve my time, but usually I do.  I do not allow myself greater time this year because I am a year older than last year.  If anything, I am also a year wiser and by running this route often I should know where to push hard on the uphills and where to save energy on the downhills.  What is important to me is that I raise the standard by which I compete with myself.