After hitting a price peak in late 2017 and subsequently fading in popularity, cryptocurrencies like Bitcoin experienced another big boom during 2019 and 2020, breaking past all-time highs. As this has happened, the number of hacking events that have been announced has also increased. Since many investors are new to the system and may not know how to keep their investments safe, hackers devise ingenious ways to steal funds. Some of the most notable thefts were those that occurred in plain sight: some hacks even blatantly redirected tokens linked to one wallet to another. Victims see their tokens stolen from them, and they can’t do anything about it.
Key Points
Users can lose bitcoin and other cryptocurrencies as a result of theft, computer failure, loss of access keys, and more.
Cold storage (or offline wallets) is one of the safest ways to hold bitcoins, as these wallets are not accessible online, but hot wallets are still convenient for some users.
Those interested in more secure storage should consider using a hardware wallet for all their long-term bitcoin and cryptocurrency storage.
The way we keep cash or cards in a physical wallet, bitcoins are also stored in a wallet – a digital wallet. A digital wallet can be hardware-based or web-based. The wallet can also be located on a mobile device, on a computer desktop, or kept secure by printing the private keys and addresses used for access on paper. But how secure are any of these digital wallets? The answer to that depends on how the user manages the wallet. Each wallet contains a set of private keys without which the bitcoin owner cannot access the currency. The biggest risk to bitcoin security is that an individual user may lose the private key or have the private key stolen. Without the private key, the user will never see their bitcoins again. Besides losing the private key, the user can also lose their bitcoin due to computer failures (hard disk failure), by hacking, or by losing the computer where the digital wallet is physically located.
Below, we’ll look at some of the best ways to store bitcoin safely.
Hot wallet
Online wallets are also known as “hot” wallets. Hot wallets are wallets that run on internet-connected devices such as computers, phones or tablets. This can lead to a security vulnerability because these wallets generate the private keys for your coins on these internet connected devices. While a hot wallet can be very convenient in the way you can access your assets and make transactions quickly, it also lacks security.
This may seem far-fetched, but people who do not use enough security when using these hot wallets can have their money stolen. This is not a rare event and it can happen in many ways. For example, bragging on a public forum like Reddit about how much Bitcoin you own while using little or no security and storing it in a hot wallet would be unwise.
These wallets are intended to be used with small amounts of cryptocurrency. You can liken a hot wallet to a checking account. Conventional financial wisdom might say only keep spending money in a checking account while the bulk of your money is in savings or other investment accounts. The same can be said for hot wallets. Hot wallets include mobile, desktop, web, and most exchange wallets.
It is important to note here that holding cryptocurrency in an exchange wallet is not the same as keeping it in your personal wallet. Exchange portfolios are custody accounts offered by the exchange. The user of this type of wallet is not the owner of the private key of the cryptocurrency contained in this wallet.
If an event happens where the exchange gets hacked or your account gets hacked, you will lose your money. Cryptocurrency exchanges do not offer SIPC or FDIC security, which makes secure cryptocurrency storage particularly important. The phrase “not your keys, not your currency” is a very recurring concept in cryptocurrency forums. As mentioned earlier, it is not wise to keep large amounts of cryptocurrency in any hot wallet, especially an exchange account. Instead, it is suggested that you withdraw most of the funds to your personal “cold” wallet (described below). Exchange accounts include Coinbase, Gemini, Binance, and many others.
While these wallets are connected to the internet, creating a potential vector for an attack, they are still very useful for being able to quickly make transactions or trade cryptocurrencies.
cold wallet
The next type of wallet, which is the safest option for storage, is cold wallets. The simplest description of a cold wallet is an offline wallet, so it is much less risky than being hacked. These wallets can also be referred to as offline wallets or hardware wallets.
These wallets store the user’s address and private key on something offline, and they usually come with software that runs in parallel so that the user can view their wallet without compromising their private key.
Perhaps the most secure way to store cryptocurrency offline is via a paper wallet. A paper wallet is a cool wallet that you can create from certain websites. It then produces both public and private keys that you type on a piece of paper. Cryptocurrency at these addresses can only be accessed if you have that piece of paper. Many people laminate these paper wallets and store them in safe deposit boxes in their banks or even in a safe in their homes. Paper wallets do not have a corresponding user interface other than a piece of paper and the blockchain itself.
A hardware wallet is usually a USB drive device that securely stores a user’s private keys. This has serious advantages over hot wallets because it is not affected by viruses that could be on the computer because the private keys never come into contact with the networked computer or potentially vulnerable programs. These devices are usually open source, allowing the community to determine their safety rather than the company declaring it safe to use.
Cold wallets are the most secure way to store your bitcoins or other cryptocurrencies. However, they often require a bit more knowledge to prepare them. It is essential for anyone interested in owning a cryptocurrency to familiarize themselves with secure storage and the concepts of both hot and cold wallets.
physical coins
Services are booming which allow bitcoin investors to buy physical bitcoins. The coin you buy will have a tamper proof sticker that covers a pre-set amount of Bitcoin. In order to purchase physical currency, you may need to pay a small premium to the value of the bitcoin you buy, due to the cost of manufacturing and shipping the currency itself.
Other security precautions
Support
Back up your entire bitcoin wallet early and often. In the event of a computer crash, a regular backup history might be the only way to restore the coin in the digital wallet. Make sure you backup all wallet.dat files and then store the backup in multiple secure locations (eg USB, on hard drive, and on CDs). Not only this, set a strong password on the backup.
Software updates
Keep your software updated. A wallet running on outdated bitcoin software can be an easy target for hackers. The latest version of the wallet software will have a better security system in place thus increasing the security of your bitcoins. If your software is updated with the latest security and protocol fixes, you may avoid a major crisis due to the enhanced security of the wallet. Constantly update your mobile device or computer software and operating systems to make your bitcoins more secure.
multi-signature
The multi-signature concept has gained some popularity; It involves the consent of a number of people (say 3 to 5) to make a transaction. Thus, this limits the risk of theft because a single console or server cannot perform transactions (i.e. send bitcoins to an address or withdraw bitcoins). The people who can transact are initially determined and when one wants to spend or send bitcoins, it asks the others in the group to agree to the transaction.