If you've been tempted to get in on the blockchain currency racket, first read tech writer Mark Frauenfelder's story of losing access to $US30,000 ($39,186) in bitcoin. Ask yourself if you could handle the stress of trying to guess a seven-digit PIN, knowing that every time you guessed wrong, your money would get locked away for hours, then days, then years. Ask yourself what you'd do if your investment paid off tenfold, only to disappear in a fire.
Photo via Trezor
Frauenfelder got into this jam by trying to be safe. In January 2016 he bought $US3000 ($3919) in bitcoin, then locked it away in a specialised USB device called Trezor. He did this so no one could hack his bitcoin by hacking his computer, or even by stealing the device. The device was locked by a string of 21 words and a seven-digit PIN. Frauenfelder wrote the words on a piece of paper, which his cleaning service threw out. He memorised his PIN, but then forgot it. Recovering his money was so stressful, just reading about it drained the blood from my face.
Of course, Frauenfelder made a big mistake in securing his code so insecurely, and not saving his PIN at all. You might think that you won't make such a mistake! But you might save your PIN and code somewhere too accessible. That's assuming you would have even bought a fancy secure USB device and not just a typical flash drive. It's also assuming you'd never just lose the device. Or leave the bitcoin on your computer, and then get that hacked.
Or maybe you wouldn't keep your bitcoin on your computer at all, but in an online exchange. That's what I did in 2011, with $US400 ($522) of bitcoin that would now be worth over $US300,000 ($391,860). Except I bought my bitcoin on the trading site Mt. Gox and left it there for three years, until the site shut down trading and claimed all its money had been stolen. Calculating that $US300,000 ($391,860) just now was... not fun. It's painful to realise that I lost a life-changing pile of money. Maybe I shouldn't have trusted my cryptocurrency to a site that began as a card-trading forum - Mt. Gox originally stood for Magic: the Gathering Online Exchange. But I traded my security for convenience, because I wanted to get in on bitcoin without doing much work.
So I lost my money, as did users of the Russian exchange BTC-e, which got shut down over laundering charges. As did AI exec Sean Everett, when thieves broke into his Gmail and T-Mobile accounts to steal his bitcoin - and his Ethereum, another popular cryptocurrency - out of his Coinbase account. As do so many people who buy some bitcoin, then leave it in someone else's hands, or on an insecure computer, or on a USB drive that somehow disappears. Managing your bitcoin takes a lot of research and work. Even then, there is no foolproof way to hold onto your bitcoin. Every way to store it brings some security risk.
So does every way to store traditional money! It's just that we've built elaborate systems around safeguarding that money, such as banks and credit ratings. These break down, too, sometimes, which is part of the appeal of alternative currencies. The global financial crisis, the fiscal cliff and bank hacks all show the shaky foundations of government-issued currency.
But the safeguards around cryptocurrency, still new and unfamiliar, break down constantly. A spoiler for Frauenfelder's story: He was only able to recover his money through an assisted hack, the digital equivalent of hiring a locksmith to break into his own home. That hack could also have been used by an actual attacker, to bypass all the expensive security that came with Frauenfelder's USB drive. He only got his money back because it was still, eventually, insecure.
If you're ready for that kind of risk, go for it! For cryptocurrency to catch on, and become safer and more convenient, first people need to make all these mistakes. But for now, don't put in what you're not ready to lose. Investing in cryptocurrency is fun and interesting. But while its systems are still so new and poorly understood, cryptocurrency is an insanely high-risk currency. Don't treat it as anything more than a gamble or a hobby - something you can gladly sink money into. Do your investing in more traditional channels - where if you lose all your money, at least everyone won't say, "Well duh."