On Bitcoin Security

With its skyrocketing price, Bitcoin’s popularity has also hit feverish levels.  Despite the mania, many newcomers still have no idea what kind of risks they face with improperly securing their investment. The most common of the “security sins” is leaving bitcoin on an exchange. Coinbase, perhaps one of the most reputable bitcoin exchanges, is insured against any hacks of their digital currency “hotwallets” – the online storage used to facilitate deposits and withdrawals of bitcoin to the exchange. However, they do not insure individual Bitcoin accounts against theft resulting from a compromised password. If a cybercriminal manages to get into your Coinbase account, there’s nothing to protect you from losing everything.

Due to the almost anonymous nature of bitcoin, many cyber-criminals have switched their focus from hacking traditional financial institutions to hacking bitcoin accounts, as the funds are much harder to trace and recover, and the risks of them getting caught are far lower. Aside from hacking, holding bitcoin on an exchange means trusting the exchange to stay solvent and honestly report any security breaches. Those who followed bitcoin in the early days remember the Mt. Gox incident, in which hacking combined with mismanagement and fraud caused the exchange to collapse in 2014.  In the process, the company lost millions of dollars in customer money. These combined factors mean those who continue to hold bitcoin or any other cryptocurrencies on an exchange face increased risks compared to traditional trading accounts.

Ransomware

Ransomware, depicted above, holds a user’s computer hostage until a fee is paid. Often the fee is paid in cryptocurrency.

To offset those risks, Savvy ‘bitcoiners’ can run programs on their computers that store their bitcoin offline, acting as personal “bitcoin banks” and sheltered from the threat of hackers. While this is the preferred alternative to holding bitcoin on an exchange, a little more technical knowledge is required to set up and use these programs. Running one of these programs, which are referred to as “software wallets” in the crypto community, is considered to be the bare minimum level of security a bitcoin owner should have. If storing bitcoin on an exchange is level 0, meaning it’s completely insecure, than software wallets are considered level 1. Software wallets offer decent security, as long as the computer they operate on is not compromised.

Continuing this analogy, level 2 would be hardware wallets. A hardware wallet is a physical device with a specialized chip designed to house bitcoin keys in a secure manner. When using the device the secret keys never leave the chip, and sending bitcoin requires one to plug the device into an internet connected computer and enter a secret passcode. However, even these “safe” mechanisms of storage have drawbacks. A Turkish man who had been flaunting his bitcoin wealth on social media found himself on the receiving end of “rubber-hose cryptanalysis” – a euphemism for extracting cryptographic secrets, like passwords, by using torture or coercion. While gang kidnappings may not be as big of a problem in the U.S., the threat of bitcoin burglary remains real.

Displayed above, a Trezor hardware wallet sending a transaction.

As one descends deeper into the “levels” of bitcoin security, a trend begins to emerge: the trade-off of convenience for security. There is a varying degree of security that makes sense for everyone. For example, a crypto trader might leave a small percent of their assets on an exchange, knowingly taking that risk because they make frequent trades, and to be constantly moving assets from the exchange to another wallet would not only be cumbersome, but would rack up sizeable transaction fees over time. The average person might be satisfied with a simple software wallet, but what does a company like Coinbase, which has to safely hold billions of dollars worth of Bitcoin, do?

It turns out Coinbase must employ the facilities that bitcoin evangelists claim are destined to be taken down by cryptocurrencies: banks. Enter, security level 3. Directly from their website, Coinbase states, “98% of customer funds are stored offline… we distribute bitcoin geographically in safe deposit boxes and vaults around the world.” So how is a digital currency like Bitcoin stored in a physical vault? Before being stored in the vault, Coinbase adds extra layers of security by splitting and encrypting the private key data. The encrypted data is then transferred to a USB device, which is then placed in a bank vault similar to other physical items or currencies of high value. Paper backup copies are also made and secured in a vault. Yes, you read that correctly. The largest bitcoin exchange in the U.S. still uses paper. Even the effortlessly digital nature of Bitcoin can’t escape the realities of the physical world.

Our recommended storage for any amount of cryptos that you or your family can’t afford to lose is security level 3 mentioned above — encrypted on a FIPS 140 compliant USB drive stored in a safety deposit box with backup USBs stored elsewhere.

Have a crypto question or request? DM us on twitter @bespokecrypto.

The Closer: End of Week Charts — 12/8/17

Looking for deeper insight on global markets and economics?  In tonight’s Closer sent to Bespoke clients, we recap weekly price action in major asset classes, update economic surprise index data for major economies, chart the weekly Commitment of Traders report from the CFTC, and provide our normal nightly update on ETF performance, volume and price movers, and the Bespoke Market Timing Model. This week, we’ve added a section that helps break down momentum in developed market foreign exchange crosses.

Sample

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See tonight’s Closer by starting a two-week free trial to Bespoke Institutional now!

Breadth and Price: Joined at the Hip

With some of the big intra-market moves we have seen in the last week to ten days, we thought it would be a good idea to provide a quick update of market breadth.  In this case, we looked at the cumulative A/D line, which takes the difference between the number of advancing and declining issues each day and adding the result to the previous day’s value.  In a healthy market, you want to see breadth either tracking or leading price, while periods where breadth lags and diverges from price is a red flag.

Take a look at the chart below for the S&P 500 where the blue line is the S&P 500’s price and the red line is the cumulative A/D line over the last year.  Could the two lines be any more similar?  Based on this measure at least, market internals remain healthy.

B.I.G. Tips – November Employment Report Preview

Heading into Friday’s Non-Farm Payrolls (NFP) report for November, economists are expecting an increase in payrolls of 195K, which would be a large decline from October’s reading of 261K.  Last month’s big decline was largely due to the rebound effect of last Summer’s hurricanes, so even though total job growth is expected to fall, 195K is still a healthy number.  In the private sector, economists are expecting a similar increase of 198K from last month’s level of 252K, and the unemployment rate is expected to remain unchanged at an exceptionally low level of 4.1%.  Growth in average hourly earnings is expected to rebound back to 0.3%, while the average workweek should remain at 34.4 hours per week.

 

Ahead of the report, we just published our eleven-page monthly preview of the November jobs report.  This report contains a ton of analysis related to how the equity market has historically reacted to the monthly jobs report, as well as how secondary employment-related indicators we track looked in November.  We also include a breakdown of how the initial reading for November typically comes in relative to expectations and how that ranks versus other months.

One topic we cover in each month’s report is the S&P 500 stocks that do best and worst from the open to close on the day of the employment report based on whether or not the report comes in stronger or weaker than expected. In other words, which stocks should you buy, and which should you avoid?  The table below highlights the best-performing stocks in the S&P 500 from the open to close on days when the Non-Farm Payrolls report has been better than expected over the last two years.  Of the 25 top performing stocks on days when the NFP beats expectations, seven sectors are represented, with Energy leading the way with eight.  Leading the way to the upside, Vornado (VNO), has seen an average open to close gain of over 2.5%.  In terms of consistency, Urban Outfitters (URBN), Skyworks (SWKS), Autodesk (ADSK), and Cerner (CERN) have been in the black 91% of the time.

For anyone with more than a passing interest in how equities are impacted by economic data, this report is a must-read.  To see the report, sign up for a monthly Bespoke Premium membership now!

Bespoke’s Sector Snapshot — 12/7/17

We’ve just released our weekly Sector Snapshot report (see a sample here) for Bespoke Premium and Bespoke Institutional members.  Please log-in here to view the report if you’re already a member.  If you’re not yet a subscriber and would like to see the report, please start a two-week free trial to Bespoke Premium now.

Below is one of the many charts included in this week’s Sector Snapshot, which highlights our trading range screen for the S&P 500 and ten sectors.  The dot represents where each sector is currently trading in its range, while the tail end represents where it was trading one week ago.  As shown, all but the Telecom sector has moved lower within its range over the last week, with the biggest drops coming in Energy, Health Care, and Utilities.

To see our full Sector Snapshot with additional commentary plus six pages of charts that include analysis of valuations, breadth, technicals, and relative strength, start a two-week free trial to our Bespoke Premium package now.  Here’s a breakdown of the products you’ll receive.

the Bespoke 50 — 12/7/17

Every Thursday, Bespoke publishes its “Bespoke 50” list of top growth stocks in the Russell 3,000.  Our “Bespoke 50” portfolio is made up of the 50 stocks that fit a proprietary growth screen that we created a number of years ago.  Since inception in early 2012, the “Bespoke 50” has beaten the S&P 500 by 63.1 percentage points.  Through today, the “Bespoke 50” is up 153.8% since inception versus the S&P 500’s gain of 90.7%.  Always remember, though, that past performance is no guarantee of future returns.

To view our “Bespoke 50” list of top growth stocks, click the button below and start a trial to either Bespoke Premium or Bespoke Institutional.

Jobless Claims Fall More Than Expected

Jobless claims saw a slight decline this week, falling from a seasonally adjusted level of 238K down to 236K, but given that consensus forecasts were looking for a slight increase to 240K, it was better than expected.  This week’s reading also represents the 144th straight week where jobless claims have been below 300K, which is the longest streak since April 1970 when claims were below 300K for 161 straight weeks.  In order to break that record, claims will need to come in below 300k right up through the end of Q1 2018.

With this week’s lower weekly print, the four-week moving average also declined slightly from 242.25K down to 241.5K.  That’s just over 10K above the multi-decade low of 231.25K reached back in early November.

On a non-seasonally adjusted basis (NSA), jobless claims spiked up by more than 100K to 325.8K from 224.9K.  That sounds like a big move, but if you look at the chart, big increases are common on a non-seasonally adjusted basis at this time of year.  In fact, this week’s print is more than 100K below the post-recession average of 442.3K.

Little Change in Investor Sentiment

In this week’s AAII sentiment survey, bulls remained out of the majority once again, extending the record to 153 straight weeks.  This week’s survey showed little change in optimistic sentiment as bulls remained right near 36%.  Given some of the weakness and rotation we have seen in recent days and knowing how fickle this group of investors has been, we would have expected the already weak bullish reading to decline, but it managed to hang in there.

Bearish sentiment, meanwhile, ticked a bit higher this week rising from 31.6% up to 34.2%, which is a three-week high.

Finally, neutral sentiment fell back below 30%, falling from 32.4% down to 28.9%.  That’s the lowest neutral reading since the first week of November.  All in all, there was little in the way of sentiment changes this week based on the AAII release.

The Closer — Curve Signals, Energy Data, Productivity Updates — 12/6/17

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Looking for deeper insight on markets?  In tonight’s Closer sent to Bespoke Institutional clients, we examine what kind of yield curve signal is the most dangerous with respect to recession risk. We also review EIA weekly data released today, and the BLS update on productivity for Q3.

See today’s post-market Closer and everything else Bespoke publishes by starting a 14-day free trial to Bespoke Institutional today!

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