The wild swings in the value of bitcoin have been widely reported over the last few months drawing broad public attention to the cryptocurrency previously known mostly in cyber-world. Reports of players getting rich overnight buying and trading bitcoin have blanketed the internet. Other reports of 50% overnight swings in bitcoin value have also drawn much attention. Here are a few thoughts on the sudden rise in popularity of cryptocurrencies, the underlying technology and the risks to the players.

I use the term “players” rather than investors here because the risk meter for dealing in cryptocurrency today is well beyond the red zone. A few problems are lack of intrinsic value, an absence of government support, potential to be declared illegal in some countries and limited acceptance as a direct medium for the exchange of goods and services. Further, now that the technology has been established, the barriers to entry for other new cryptocurrencies, such as Monero and Etherium, are minimal allowing currency competition to grow rapidly.

Bitcoin, cryptocurrencies
– Thinkstock / Andrey Suslov

So, generally, if you are buying and selling cryptocurrencies you are playing a risky game with a new and volatile medium. bitcoin is unregulated and anonymous and a potential haven for criminal activity. This is compared to investing in a proven enterprise for future returns based on a history of anticipated gains with a calculated and somewhat predictable risk formula.

The price of a bitcoin has been fluctuating wildly. You hear friends say how they made thousands in a few days buying and selling bitcoin. However, you likely will not hear friends tell you how they lost thousands. If you bought in October 2017 you paid $5,700 for one bitcoin. If you bought in December, you paid over $17,000. If you bought in February 2018, you paid $8,300. As a result of these dramatic fluctuations, Lloyds of London is refusing to allow punches of bitcoin on credit. This volatility may settle, or it may crash. Choose your strategy wisely and don’t bet your rent.

Technological background

The technology that makes bitcoin possible is called Blockchain. It is a transparent, decentralised ledger of transactions, concurrently hosted on numerous mainframes around the world, allowing digital currencies to operate. All bitcoin transactions use Blockchain technology but all Blockchain applications are not only for bitcoin. Blockchain cuts out the middleman, such as a bank, allowing the direct peer to peer transactions and verification. It has potential as a new transactional model for real estate, finance and even voting. The entire network consists of a single chain of blocks of data. All transactions that occur at about the same time are put into a block. The trust and verification are built into the protocol. Blockchain acts as the ledger of accounts, database, banker, notary, sentry and clearinghouse.

Traditionally, if party A wants to send money to party B, most people use some application connected to their bank which is the arbiter of the transaction. The bank accepts party A’s request and sends the money from party A’s bank account into party B’s bank account.

Using Blockchain technology, party A creates a “block”. The block is transmitted to every party on the network. The network approves that the transaction is valid, and the block is added to the chain. The transaction, once added in the chain, is transparent to everyone on the network and cannot be altered. The final step is for the network to move the money into the account of party B. While this technology is only in its infancy, very large companies such as IBM and the Bank of Canada are investing in its future.

Blockchain has a high degree of security built into the protocol. The internet is designed to transmit information. Blockchain is designed to transmit value. Information on the internet is stored centrally in servers. Blockchain data is verified by the network and stored everywhere creating severe challenges to hackers. However, hackers are working overtime to attack this new technology.

According to a January blog post from Recorded Futures, a North Korean organisation known as Lazarus Group appears to be behind a series of phishing emails. Phishing emails use stolen information and corrupted attachments to get login information and passwords. These attachments also can download malicious payload that is designed to collect device information. Because cryptocurrency is anonymous, rogue nations such as North Korea and other criminal organisations have a deep interest in these technologies. The legitimate exchanges will be under constant attack from these bad actors.

While Blockchain transactions are more secure by design, they will not be immune from attacks. Traditional attacks such as phishing may be deployed to gain control over credentials that will appear legitimate to the system. The moral is to not be lulled into thinking that network security measures will not be needed as new technologies take root. Network security plans should continue to be updated, perimeters protected, and employees trained to safely manage emails and other electronic communications.

Blockchain will become a transactional force in the next decade. Whether or not you are a bitcoin player, you will be likely touched by Blockchain technology in the next few years. While it may not pay off buying bitcoin, it will be a good idea to look ahead and get to know blockchain technology.

Alastair Hartrup is global CEO of Network Critical