Avoid Hackers: Here’s How To Safely Store Cryptocurrency
Physical keys are slowly going out of style thanks to the age of digital technology. We are now more connected than ever on multiple devices, and we enjoy remote access and control of our assets.
Electronic keys may ease remote access and control, but they are easy to hack. Savvy programmers can reprogram their access control code and access a whole network. New cryptocurrency investors are often surprised that digital assets function via a digital key system as well. This article details how to safely store cryptocurrency for your long-term investments.
What is cryptocurrency?
A cryptocurrency is a digital representation of value. Unlike other forms of electronic key systems, digital currencies use complex cryptography to secure their value. Cryptography makes digital currency keys nearly impossible to hack, double-spend, or counterfeit.
Virtual currencies also store their data on a blockchain, making it immutable, transparent, and free of intermediaries such as banks. You can therefore send bitcoin to a person across the world without the intervention of your credit card provider, bank, or payment gateways such as PayPal. As a result, cryptocurrencies give you complete control of your wealth, operating peer-to-peer.
The crypto public-key cryptography system
So, what happens when you purchase a cryptocurrency? When you make a crypto purchase, you will not receive any physical coin or note as proof of purchase.
If you, for instance, purchase BTC, the Bitcoin blockchain protocols will encrypt your transaction via asymmetric encryption. This complex cryptography validates and authenticates data, preventing double-spending, hacking, or counterfeiting.
Cryptocurrency asymmetric encryption leverages the public-key cryptography system. This system creates a one-way math function that encrypts your purchase transaction into a public key. It also pairs that public key to a private key.
Your public key represents a wallet address. That wallet address has the details of your private key. You can share your public address with the peer-to-peer network. Your public key functions like your physical address, receiving and sending cryptocurrencies to the rest of the peer-to-peer network.
The private key is a long alphanumeric digital key that gives you control of the cryptocurrencies in your public address. It encrypts your public key. Consequently, if you share your private key details with the public, any person can locate your wallet address and cart away your crypto stash.
Private keys, therefore, are the most important feature of the crypto storage process. They allow you to spend the crypto associated with your public address. A private key can be a combination of a 64-digit hexadecimal code, a 256-character long binary code, or a mnemonic phrase.
A private key’s large numbers are impossible to guess, building a one-way trapdoor function between the public and private keys. Therefore, secure private key storage is a crucial element of the crypto purchase process.
Effects of private key loss
So, if private keys have bank-like security, why is there so much lost bitcoin? Bitcoin investors have lost over 20% of all mined coins. They have lost bitcoin worth over $100 billion in the last decade. As per Chainalysis, a blockchain data forensics firm, BTC investors have lost an average of 2.78 million bitcoin to the ether out of the 19 million BTC in circulation.
Is this bitcoin recoverable? As per Chris and Charlie Brooks of CryptoAssetRecovery.com, only 2.5% of this stash recovery is recoverable. Here is why. The main idea behind cryptocurrencies is the acute decentralization of transactions.
Cryptocurrencies place you at the helm of your finances. But with great freedom and control comes a heavy responsibility for your private keys. If you lose your private key, you have no one to appeal to.
Decentralized networks do not have customer care representatives or a central administrator. Then cryptography and blockchain ledgers render all crypto transactions immutable. So, if you share your private key with the public, a thief can transfer your assets from your public address.
As per Cryptovantage data, 39.7% of crypto owners have forgotten their wallet’s password. Fortunately, 95.6% of these losses are recoverable. But, then, 32.6% of crypto investors have lost their private keys to scammers. Such losses may be irrecoverable.
Investors who lose their wallet’s password and its seed phrase or use weak passwords may not recover lost private keys.
How to safely store your cryptocurrency
Exchange hot wallets
Most crypto investors purchase their digital assets on crypto exchanges. Consequently, the blockchain network will send their private keys to the exchange’s hot wallet. Hot wallets run on devices that have a live internet connection.
For this reason, hot wallets are vulnerable to hackers. Hackers can, for instance, hack an exchange’s server and access your private keys. For example, on January 17, 2022, Crypto.com lost 443BTC and 4836 ETH to hackers. These assets were worth over $30 million. As per the cryptocurrency exchange’s report, a hacker exploited a weakness in the exchange’s user account log-in process, embezzling user private keys.
There are also cases where crypto exchanges defraud users of their private keys. For example, in 2018, the Italian crypto exchange BitGrail lost over $170 million worth of user assets. An Italian court found the BitGrail CEO guilty of the loss.
Then in April 2021, Turkish crypto exchange Thodex abruptly shut down its operations, and its CEO fled to Thailand with close to $2 billion worth of user digital assets.
To avoid scam exchanges, go for a transparent mainstream exchange. It should, for instance, have clear address documentation and regulatory licenses. Use exchanges with a high online reputation and high-security protocols. The best crypto platforms have many reviews and features on crucial digital space discussions and developments.
Most crypto investors trust exchange wallet providers. For example, data shows that 73% of SoFi exchange users believe their wallets are secure.
But, hot exchange wallets are the least secure means of crypto storage. Moreover, they are a honeypot for hackers since they hold massive amounts of private crypto keys at any given time. However, they are a necessary evil for active traders, supporting quick transaction and margin trading processes.
It would be best if you only kept trading capital on an exchange’s hot wallet. If you are not a trader, but a long-term hodler, withdraw your private keys from the exchange’s hot wallets and store them in your offline wallet.
Savvy crypto users can trade securely on decentralized exchanges such as Uniswap since they are non-custodial platforms. Every decentralized exchange user stores their crypto assets in their wallets during a trade. A margin trader can, for instance, trade on the dYdX platform for enhanced security.
Most crypto holders that heed caution will withdraw their private keys to a software wallet. Over 58% of cryptocurrency holders prefer desktop wallets for their investment management. In addition, 53% of them favor mobile wallets, while 33% use online wallets.
Unfortunately, desktop, mobile, and online wallets fall in the hot wallet class. In addition, software wallets connect to the internet and are vulnerable to hackers and malware.
Some of the most popular online wallets are MetaMask and Trust Wallet. Web wallets have the advantage of convenience, making it easy to access your assets while online. In addition, these wallets will store your private keys on the provider’s server.
That means that hackers could exploit this server. Then most web wallets integrate crypto exchanges, placing their users at the risk of exchange hackings. Instead, use web wallets to store negligible amounts of assets and use them for on-the-go transactions.
Mobile and desktop wallets
You can install these software wallets on your electronic devices and temporarily store your private keys. Mobile and desktop wallets will store your private keys on your hard disk space. They are safer than web wallets since you can beef up your device’s security software to ward off malware and hackers.
They are also convenient for on-the-go transactions and support features such as QR code scanning for trade or real-world purchase purposes. However, mobile and desktop wallets are vulnerable to malware, viruses, and hackers.
They also can lead to the loss of private keys and wallet seed phrases and passwords when they crash or are lost. To illustrate this point, James Howell, a UK IT worker, tossed out a computer hard drive that held private keys to 7500 BTC in 2013.
Howell has made a couple of landfill excavation appeals to the Newport City Council in his bid to rescue his lost bitcoin stash. Unfortunately, his appeals have fallen on deaf ears, and he could lose his bitcoin forever. You can make desktop wallets safer by keeping these devices disconnected from the internet.
Then back up your mobile or desktop wallet for seed phrase recovery should the device crash or get lost. Popular desktop wallets include Exodus, Bitcoin Core, and the Electrum wallet. Zeno, Exodus, and the Trust Wallet are popular mobile wallets.
Change your password regularly and make it complex to keep software wallets secure. Use different passwords for all your wallets and leverage multi-factor authentication (MFA) and two-factor authentication (2FA) for extra security.
Cold wallets provide the safest crypto assets storage system. Cold wallets include hardware wallets or physical devices that store crypto data offline. Paper wallets are also a form of cold wallets. Every holder should withdraw their crypto private keys from software wallets to cold wallets.
A paper wallet is a simple paper print of your private and public keys. You can also print out a QR code version for your private key for easy movement of funds on web platforms such as MyEtherWallet or the Bitcoin Paper Wallet.
Paper wallets are highly secure, but they have some level of loss risk as well. You can quite easily lose a paper wallet to fire, flood, or other forms of damage that make your paper wallet illegible. However, you can enhance your paper wallet’s security by making multiple copies and laminating them to secure them from the elements.
Store these copies in secure and diverse locations such as bank vaults. Alternatively, engrave your private keys on sturdier materials such as metal.
Hardware wallets store assets on eternal devices. Besides cold storage security, hardware wallets have features that support online payments. Advanced hardware wallets provide web interfaces that allow crypto to crypto and crypto to fiat swaps.
Hardware wallets, however, have a protocol that isolates your private keys from the online world when you plug them into an electronic device. As a result, they are the most secure means of crypto storage. Unlike other wallets that are free to use, hardware wallets come at a cost.
Then some hardware wallets may not support some crypto coins. They have limitations in coin support, but most of them integrate mainstream cryptocurrencies such as ether and BTC. Secure your hard wallet’s password by protecting its recovery seed phrase. Write down your seed phrase on a paper wallet or indestructible titanium plates.
Popular hardware wallets include the Ledger Nano S, Trezor, and SafePal. As secure as hardware wallets are, they are vulnerable to the $5 wrench attack. Should a malicious person find out that you have a stash of BTC, they could threaten or physically attack you to steal private keys.
To avoid falling prey to the $5 wrench attack, use a decoy wallet that only holds a fraction of your portfolio. If you fall prey to a $5 wrench attack, use your decoy wallet to escape any rough handling. Then, keep your crypto success to yourself.
If you show extreme zeal or emotion about a crypto-asset on your public profile, you could be doxxed by opposing crypto fanatics, placing you at the risk of a $5 wrench attack. Doxxing is the process that reveals personal information such as physical addresses, phone number, or your spouse’s name. If you are going to voice controversial or divisive crypto sentiments, stay anonymous.
You must properly store your cryptocurrency to protect it. Hardware wallets are the most secure, but they come at a cost. Do your homework and find a crypto wallet that works for you.
Theresa is a personal finance blogger. She writes content for busy professional women to take control of their money and investments. She enjoys reading, traveling, cooking, and writing. Her work has been featured on GoBanking Rates, Your Money Geek, Savoteur, the Corporate Quitter, Thirty Eight Investing, and more.