Technological advancement has made it possible for people to communicate, work, shop and transact using advanced tools and platforms. The fintech sector, in particular, has made great strides in the use of technology, paving the way for cashless payments and the use of cryptocurrency. The latter has evolved since Bitcoin (the first cryptocurrency) emerged. Its growth and use have given rise to many other types of cryptocurrencies, which are estimated to exceed 2,000 in number.

The use of cryptocurrency allows users to transact on a digital payment system that doesn’t rely on central authorities such as banks to manage the transactions. Rather, the cryptocurrency ecosystem is a peer-to-peer one where any user can transact with another, with the payments existing as digital entries in an online database. Users store their cryptocurrency in a digital wallet, and their transactions are stored in a public ledger.

By using blockchain technology (upon which the public ledger technology is built), transactions are time-stamped and recorded in blocks. It’s a technical process that involves the use of cryptographic methods, but the result is a ledger that’s hard to tamper with or hack into. Additionally, cryptocurrency transactions make use of two-factor authentication, so that users have to provide a second security code in addition to their primary password.

However, the use of blockchain and cryptographic methods to encrypt data doesn’t make cryptocurrency infallible. In fact, hackers have been able to bypass security measures and inflict losses on various cryptocurrency exchanges (where users trade in cryptocurrencies). An infamous example is the hack of Japan’s Mt. Gox exchange in 2014, where hackers stole $480 million worth of coins.

Even if it’s not hackers attempting to steal, other valuable assets such as the numerical keys that unlock coins must be stored safely. Where this is not done well, it can lead to complications if the holder of the keys is unable to provide them.

A Secure Proposition

So highly prioritised is security in cryptocurrency that various companies have dedicated their efforts to providing it. Coinbase, the largest cryptocurrency exchange in the United States (U.S.), is one such company. On the outside, it follows the business model of many financial institutions, drawing in customer funds through bank wires. Its assets (numerical keys for unlocking cryptocurrency) are stored in vaults, and it has managed to get insurance coverage for its services.

Internally, Coinbase has implemented a few security measures that help sell security as its value proposition. The company’s compliance staff looks through transactions to find any traces of money laundering. Additionally, Coinbase conforms to a rule that requires paperwork to be filed when customers move their coins through different exchanges. To comply with this, the company regularly sends the required reports to the Internal Revenue Service (IRS) on traders who meet certain thresholds within a year.

Safe Investing

Investments of any kind carry some element of risk. However, those interested in cryptocurrency must be extra careful, especially when it comes to understanding digital currencies and the various technologies in use.

Razi Salih, a businessman with over a decade of experience in the fintech sector, is among those who have established projects and made investments in cryptocurrency – and the ability to do so is guided by the following aspects:

  • Proper Research: It’s prudent to perform due diligence on a cryptocurrency exchange before investing. These platforms enable the purchase and selling of digital currencies, and any individual interested in using one should research, read reviews and follow up with experienced investors about them.
  • Storage Options: If you purchase cryptocurrency, you must have a place to store it. It could be in a digital wallet or an exchange such as Coinbase. As with exchanges, it’s vital to research the different options and evaluate their benefits and security features.
  • Diversification: Just like in conventional investments, investing in several digital currencies helps to shield an investment from volatility.