Where’s the ETH? Part 1: Exchanges and how not to get Goxxed

Ethereum-homestead-background-21The Ethereum project recently released their stable Homestead update, and along with that brings more interest in the blockchain based system. As more people begin working with Ethereum, there will be a greater need to hold and store Ether, the crypto fuel for the Ethereum platform. Like Bitcoins and other altcoins, Ether is a crypto token system used to run transactions on the global Ethereum Virtual Machine. Unlike Bitcoin though, the amount of ways to store your Ether is currently limited.

This is part 1 of a 2 part post on obtaining, trading, and storing Ether. In this series, we will discuss what Ether is, how to get it, invest in it, safety with exchanges, transacting with Ether, and finally how to store Ether securely.

What is Eth, how do you get it, and where do you get it?
In previous articles, we wrote about what Ethereum is, and How to buy and store Ether, but here is a quick rundown on the system.
Ethereum is a global virtual computer platform that runs transactions and programs through a Blockchain style system. Every program, smart contract, and value transfer in Ethereum needs “gas” to run. That gas comes from Ether. The purpose is to create a system where transactions have a cost to them, designed to compensate those running nodes and mining the system. It also acts as a barrier for malicious code running wild through the network, as it would have a cost associated to it which would be economically unfeasible to run.
Currently, the best ways to get Ether are to mine it or trade fiat currency for it. (Fiat currency is traditional money backed by governments).

Mining is the act of using a computer to run computations designed to help build the next block in the Ethereum blockchain. As a computer solves a complex computational calculation related to the building of a block, they are rewarded with Ether tokens. Currently the value is 5 tokens for each block solved. Mining with Ethereum is best left to computers with Graphic Processor Units (GPUs) if you are serious about mining for Ethers. The Ethereum platforms roadmap includes a future shift away from verifying blocks through mining and moving to a method of verification through staking. This method would let computers stake a set value of Ether to guarantee the transaction instead of the traditional mining.

Investing in Ether means going to exchanges that accepts fiat currency and gives you Ether tokens in exchange. During the Frontier release of Ethereum, there were a small number of exchanges around the world that traded in Ether, but now that the Homestead release of Ethereum is upon us, more will come online. Exchanges allow you to transfer funds into an account, and buy and sell Ether on the market. Some of the exchanges that currently offer Fiat to Ether exchange are Kraken, Poloniex, Bitfinex, Coinsquare, and QuadrigaCX. While some exchanges will simply let you buy and sell Ether, others will provide more advanced features like margin trading and short selling.

How to not get Goxxed
In the cryptocurrency world, the term “Goxxed” refers to the events leading up to the shuttering of Mt Gox, one of the largest Bitcoin exchanges in the world a few years ago. At its peak, it ran close to 80% of all bitcoin transactions. The loss of over $350 million in Bitcoins due to what was believed to be corruption within Mt Gox has led to obvious nervousness from anyone holding their cryptocurrency in exchanges. While there are a lot of reputable exchanges around the world, the prevailing belief is if you don’t hold the public and private keys to your account, then your account is not secure.

The best rule of thumb is to hold only as much Ether in exchanges as you need for trading and then move it out to a secure wallet. Do not leave it there any longer than you need to. The beauty of cryptocurrency is the speed we can do value transfers, so there should be no need to keep high volumes there. While security has greatly improved in the online exchanges since Mt Gox, it is still in your best interest to manage your own crypto keys.

One thing that is shared amongst all cryptocurrencies is that the onus is always on you to secure and store your value. Unlike traditional banks that have insurance and large governments backing it up, cryptocurrency is new and evolving. You are ultimately responsible for your Ether. In short, keep your private keys private, and never forget your passwords!

Now that you know a bit more about what Ether is, how exchanges work, and their security flaws, our next article will cover how to safely transact with Ether and securely store it. Read the next article on the topic ”How to Buy and Store Ether: Part 2”.



Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

To Top