Crypto safety has been a hot topic ever since the emergence of Bitcoin. As decentralization aims at cutting out all middlemen, the responsibility for coin storage is with the user. The number one rule is: keep your private key safe. The best way to accomplish this is using hardware wallets.
“How safe are cryptocurrencies?” is one of the most frequently asked crypto questions.
Well, how safe is online banking? How safe it is to keep you cash under your bed?
The answer to all of these questions is the same: It depends!
It depends on how YOU ensure the safety of your assets. Especially in case of crypto, the emphasis is on you, because the main goal of decentralization is to cut out the middlemen. This freedom comes at a price: increased responsibility of the user.
Decentralization means there are no banks involved and you should not store your coins at a centralized agency like a crypto exchange either. The responsibility for your money lies with YOU.
The number one rule in the crypto space: Do not give away your private key
There have been several high-profile cryptocurrency attacks over the last couple of years. Crypto owners have lost a significant amount of money and could not get it back. Mt. Gox, where US$ 450 million worth of Bitcoin were stolen, is just one of the more prominent examples.
Once a wallet got hacked, the anonymous nature of blockchain technology makes it nearly impossible to recover stolen funds. It may be possible to track where the funds have gone, but it is not possible to reverse transactions. Hence, there is little hope to ever recover stolen bitcoins.
When storing Bitcoin in a wallet, users have a private key and a public address. The public address is used to transfer coins to other users. The private key is needed to access the wallet. Hence, if your key gets into the wrong hands, you can most likely kiss your money goodbye.
Most cyberattacks have one commonality: the targets are centralized hot wallets, either on public exchanges or online storage services.
The majority of online exchange platforms use hot wallets. They manage private keys on behalf of their users. You see where the problem is? If you’re using a hot wallet, you are trusting the security practices of your provider. That’s generally not a good idea.
That brings us to the basic rule of crypto safety:
DO NOT GIVE AWAY YOUR PRIVATE KEY!
It’s no different with online banking or using a credit card. You wouldn’t give away your passwort then either, would you?
Hardware wallets are currently the safest storage solution available
Following this rule means you should not use any third-party wallets that store the private keys of their users. That includes all online web wallets such as coinbase, blockchain,info, etc.
You should also not use any hot wallets that are permanently connected to the internet, for example via an app. There is no problem using apps to make payments, but not for storing your assets.
The better way is to use so-called cold storages, meaning a storage solution that is not permanently connected to the internet.
Hardware wallets are currently the most secure way to store cryptocurrencies.
These are small devices that need to be plugged into a computer and connected to the web to enact cryptocurrency transactions. They offer maximum security, as they are not permanently online and therefore hardly hackable.
However, hardware wallets can be stolen or lost, just like cash. So keep them at a safe location.
The currently most popular hardware wallets are the Ledger Nano S and the Trezor. They look like a USB stick or flashdrive and are easy to carry and straight forward to handle. No advanced computer skills are required.
You can install a software wallet either on your computer or smartphone. The private key is stored just on that machine and the wallet is not permanently connected to the internet. This reduces the online exposure of your private key.
As with online banking, the risk here comes down to the safety of your device. If your computer or phone gets infected with malware, hackers could get access to your private keys and clean out your wallet.
Paper wallet just means a piece of paper on which you print the private and public keys of bitcoin addresses. You can use an online service such as BitCoinPaperWallet to create new addresses and print them on your domestic printer. Then you can send some bitcoins to this address and store the paper away safely. Paper wallets, however, require some advanced understanding of how the crypto space works.
As maintaining paper wallets takes time and software wallets are more risky than hardware wallets, I recommend to just go with hardware wallets. They are the safest options on the market and the price is well worth the added security and peace of mind.
You could also go for a hybrid approach: Use a hardware wallet to store most of your coins and a software wallet to maintain a spending balance. This way you don’t always have to connect your hardware wallet to execute a transaction.
Whatever way you choose, YOU are responsible for the safety of your coins.
Decentralization is the main point of the blockchain revolution. It creates more independence from middlemen. But responsibility is the price of freedom.