Bitcoin itself is tough to hack, thanks to the blockchain framework that underpins it. Since the blockchain is regularly reviewed and updated by the bitcoin community, hacks are unlikely.
But the fact that bitcoin is difficult to hack doesn’t mean that it is 100% safe and secure. There are potential security risks at various stages of the cryptocurrency trading process. Scams like Ponzi schemes and phishing attacks remain some of the popular methods for cybercriminals.
Just as you may keep your gold jewelry in a safe deposit box or your hard-earned cash out of plain sight, it pays to put a little effort into how you manage your digital currencies.
What then can you do to protect your cryptocurrencies against theft? Here’s how to safeguard bitcoins and other cryptocurrencies.
Hot storage and cold storage
It is worth noting there are two types of cryptocurrency storage: hot storage and cold storage. Hot storage is akin to the traditional wallets that you carry in your pocket. Hot storage is when you keep your digital coins in a device which is directly connected to the internet. However, if you keep your digital assets in hot wallets like Coinbase, Bitfinex or Binance, then you’re putting the ownership of your coins under grave risk.
Pros of hot storage
- A wide range of options to choose from;
- Easy to access funds;
- Great User Interface.
Cons of hot storage
- Hacking hot wallets is easy.
If you are keeping large amounts of cryptocurrency, consider creating an offline or cold wallet to store your coins. Cold storage is somehow similar to your bank account as it is not connected to the internet. If you want to keep your virtual coins secure for an extended period of time, then you should use cold storage as it is more secure.
Pros of cold storage
- More secure than hot wallets;
- As it is completely offline, this provides a greater level of safety.
Cons of cold storage
- Cold storage devices are expensive;
- Not ideal for regular or quick transactions.
Types of Cold Wallets
1. Paper Wallet
Paper wallet involves printing public and private keys on a physical paper. They are cold storage (offline storage), meaning they cannot be attacked or hacked by evil profiteers. The keys are printed in the form of QR codes. You can scan these codes in the future for all your transactions.
If precautions are followed, there is no possibility of your private keys being revealed to anyone else. This means the importance of keeping a backup of them cannot be overemphasized.
If you lose your private key, you lose the entire money in your paper wallet. But then again, that is true for every cryptocurrency wallet out there.
Note that at the end of the day, a paper wallet is still paper. It is very fragile and can easily get worn out over time. Or anyone can photograph it and steal your coins. The best solution is to keep a small portion of your cryptocurrency in a paper wallet and some in a hardware wallet. As the adage goes, “do not keep all your eggs in one basket.”
2. Bitcoin desktop wallet
Basically, desktop wallets refer to wallets that store public and private keys for your digital assets on your hard drive. Usually, cryptocurrency desktop wallets are renowned for having advanced security levels. They are thought to be more secure than virtual wallets as they are more difficult to steal.
Popular desktop wallets include: Hive (OS X) and DarkWallet. If you want high levels of security, then these might be the right crypto wallets for you. However, use of desktop wallets is limited due to the immobile nature of desktops. Also, a desktop wallet needs to be connected to the internet in order to gain full access to your private key. Desktop wallets require downloading and syncing the entire blockchain. These make them inconvenient.
3. Hardware wallets
Cryptocurrency can be stored in physical devices. Such devices are called hardware wallets. They use encryption to keep your private keys secure. Hardware wallets are typically small and portable in nature. Normally, they are connected to a laptop or even smartphone to access the wallet software. Popular hardware wallets include Open Source Trezor and Ledger Nano S. Unlike desktop wallets, hardware wallets don’t require downloading and syncing of the entire blockchain. The wallets are also portable. For a large amount of cryptocurrency, hardware wallets are a great solution.
A hot wallet is convenient, but security could be a big problem. Hot wallets should be thought of as the cryptocurrency equivalent of walking around with hard cash. This is considered less secure than keeping the money in the bank. The safest option is, therefore, a cold wallet. Even so, some cold wallets can be affected by malware that might be hosted on the hardware. For this reason, it’s recommended to have a properly updated security solution to run full scans frequently.