Let’s Talk Bitcoin
For this latest Room 228 Newsletter the bowers.law team decided to take a closer look at Bitcoin, the technology and ideas powering the cryptocurrency revolution.
In 2010, programmer Laszlo Hanyecz bought two Papa John’s pizzas for ₿10,000 in the first known commercial use for the cryptocurrency. Fast forward to 2021, Bitcoin reached its all-time high during February 2021, with a single Bitcoin trading at over US$50,000 and is undoubtedly the fastest-growing asset class over the past year.
Multinational companies have started to buy into the growing influence of Bitcoin and have shifted their asset base to further open the possibility of using Bitcoin in future transactions:
- MicroStrategy invested US$250 million in Bitcoin as a treasury reserve asset (August 2020)
- Square, Inc. placed approximately 1% of their total assets (US$50 million) in Bitcoin (October 2020)
- PayPal announced that all users in the US could buy, hold or sell Bitcoin using PayPal (November 2020)
- Tesla announced that it had purchased US$1.5 billion in Bitcoin and plans to start accepting Bitcoin as payment for vehicles (February 2021)
With all this talk around town about Bitcoin, it has got us at bowers.law curious – what is Bitcoin and how does it all work?
What is Bitcoin?
Virtual Asset: Bitcoin was created by Satoshi Nakamoto and launched in 2009 as the first crypto-based currency in the world. Bitcoin is currently the largest cryptocurrency by market capitalisation and its creation has given rise to a wave of other cryptocurrencies built upon decentralised networks.
Cryptocurrencies: Currencies which are modelled on Bitcoin are collectively referred to as altcoins. Ethereum, Litecoin and Tether are some of the commonly used digital tokens other than Bitcoin. There are now more than 4,000 cryptocurrencies in existence as of January 2021.
Decentralised: Cryptocurrencies are almost always designed to be free from government control or a single administration. Users can send or receive Bitcoins on a peer-to-peer basis without the need for intermediaries.
Tokens, Coins & Cryptography: Cryptocurrencies usually take the form of “tokens” or “coins”. “Crypto” or cryptography, allows for the creation and processing of digital currencies and their transactions across decentralised systems.
How Does It All Work?
Blockchains: For the Bitcoin system to work, network computers are made to work out difficult calculations to process Bitcoin transactions in blocks. Once the blocks are verified successfully, they are added to the blockchain and ownership of Bitcoin for every transaction is recorded and verified in a public distributed ledger.
Transactions: The design codes for Bitcoin allow for the issue of new coins as reward for processing and verifying the block transactions, a process more commonly referred to as “mining”. Outside of the mining community, Bitcoins can be bought or sold with traditional (fiat) currencies or in exchange for products or services where they are accepted. Bitcoin owners usually purchase their cryptocurrency supply through Bitcoin exchanges that facilitate transactions of Bitcoin and other digital currencies.
Keys: Bitcoin ownership essentially boils down to two numbers, a public key and a private key – analogous to a username (public key) and a password (private key) to access Bitcoin. Unlike traditional currencies, there are no dedicated banks or physical wallets that can be used to keep Bitcoin holdings secure, and Bitcoin wallets are used to store the public and private keys to authorise transactions and access the Bitcoin address of a user.
Wallets: Wallets are divided into two types: “hot” wallets and “cold” wallets. Hot wallets are accounts held on-line with cryptocurrency exchanges or web-based applications. Cold wallets are accounts stored by off-line means in software, hardware, or paper form.
How Secure are my Bitcoins?
The ability for cryptocurrencies to be traced through their history makes them extremely difficult to be tampered with. However, once the funds are stored in wallets or in accounts with cryptocurrency exchanges, it is possible for the private keys to be lost and there have been instances of security breaches into accounts held with cryptocurrency exchanges. Given the epic surge in the value of cryptocurrencies, the team at bowers.law are seeing an uptrend in cryptocurrency-related scams – we’re advising victims of ‘live’ crypto-scams right now!
Tips for Keeping Your Bitcoins Safe – Be Crypto-clever!
Spread Your Funds
Conventional wisdom of not putting all your eggs in one basket is a neat analogy and placing your Bitcoins in several wallets is an effective way to spread the risk. Funds needed for active trading and exchanging can be stored in a hot wallet whilst other funds intended to be kept for the longer term should be kept off-line in cold wallets for safe storage. Once transactions are completed, large funds should be transferred into private wallets and not be kept in the exchange account for a prolonged period.
Beware of Phishing Websites and Emails
In our series of Room 228 Newsletters dealing with fraud, we look at how phishing techniques can be used to infiltrate and compromise email accounts and other password-protected accounts. Fraudulent schemes of this nature are becoming increasingly elaborate and ambitious in their scope and bad actors are constantly improving their techniques to trick users into falling for their scams, clearing out funds in the victim’s account into their own wallets. You should pay attention to the security certificates of websites and emails of the exchanges to ensure that they are coming from legitimate sources.
Check the Address
Before any payment transactions are made, double-check the crypto address to make sure that funds are being sent to the correct and intended destination. This is to prevent malicious programs substituting a hacker’s address as the recipient of your transaction.
Use a Secure WiFi Connection
Public and unsecure WiFi connections may expose you to malicious spyware. Make sure that you are using a reliable and safe connection before making transactions on exchanges or use devices with private data from your wallets.
Enable Authentication and Update Device Software Regularly
Enabling signing-in authentication on cryptocurrency wallets (such as security keys and biometric identification) is an effective method to protect sensitive information as you access into your account. Having frequent software updates and virus scans can make your devices less vulnerable to such attacks.
Unlike conventional banking deposits where the operation of statutory deposit protection schemes offer protection of deposits held with banks within specific jurisdictions (in Hong Kong, the Deposit Protection Scheme offers protection of eligible deposits per depositor and per scheme member for up to HK$500,000), there is no equivalent safety net for deposits of cryptocurrencies at cryptocurrency exchanges. Taking note of these tips will hopefully help you improve your online security and protect your Bitcoin funds.
This Newsletter is not intended to be and should not be relied on as legal advice. You should seek professional legal advice before taking any action in relation to the subject-matter of this Newsletter.