Bitcoin’s soft and vulnerable underbelly.

How can you lose playing the cryptocurrency investment game? Let us count the ways.

Yes it’s obvious, or should be, that simply investing in Bitcoin or its hundreds of crypto colleagues can be a wild ride. You can make money fast, but you can also lose it fast. Any sober financial adviser will tell you only to play with money you can afford to lose.

But there are ways beyond the fluctuating value of a currency that you can lose as well, and with no prospects of your investment bouncing back. Cryptocurrency exchanges are websites where such currencies are bought, sold and stored. For Bitcoin and its ilk they’re a soft and vulnerable underbelly.

Bitcoin owners can spend, sell, trade, donate or otherwise use their bitcoins with little fear of the strong cryptography behind it being cracked. It’s as close to bulletproof as you’ll get – so long as you keep your private keys private.

If you upload your private keys to an exchange to make trading easier then your keys are at the mercy of that site’s security.

Websites can be hacked and keys can be stolen. And there is no Federal Deposit Insurance Corporation (FDIC) to protect your assets – the exchanges are not backed by any governments or central banks.

Besides that, they are run by people who may or may not be trustworthy and who are not regulated. They might be as clever as Satoshi. They might not. They might be crooked. They might be incompetent. Their sites might be insecure. All that can add up to serious subtraction – as in the loss of millions.

One victim is Dan Wasyluk, who served as the opening anecdote in a Reuters story last week about the risks of cryptocurrencies, which began by noting that he had, “discovered the hard way that trading cryptocurrencies such as Bitcoin happens in an online Wild West where sheriffs are largely absent.”

In Wasyluk’s case, about three years ago he and some colleagues took bitcoins they had raised for a tech venture and parked them in escrow with a company running an exchange called Moolah. Months later the exchange collapsed. The former CEO, Ryan Kennedy, who created the exchange under the name Alex Green, is awaiting trial in Britain after pleading not guilty to fraud and money-laundering charges.

The group’s loss of 750 bitcoins was estimated at about $3 million, and Wasyluk, probably correctly, doesn’t think he’ll get any of it back, given that Kennedy is currently serving jail time on a rape conviction.

Wasyluk is not an outlier. Given the underground nature of the entire cryptocurrency structure, it should be no surprise that Reuters found that the exchanges, “have become magnets for fraud and mire of technological dysfunction … posing an underappreciated risk to anyone who trades digital coins.”

By Taylor Armerdin.

Culled from Yahoo News.