Tech
Protect your Bitcoin from theft and hacking
How to protect your Bitcoin from theft and cyber attacks?
The best way to protect your bitcoin and other digital assets from theft is to store your private keys in a cold wallet. Cold wallets are not connected to the Internet or another device.
No storage device is 100% secure, but there are several ways to protect your cryptocurrency keys.
Key points
- Cold wallets, also called cold storage, are the best way to protect your Bitcoin private keys.
- Some exchanges provide institutional-level secure cold storage for user keys, but some critics advise against this method.
- Some exchanges offer cryptocurrency theft insurance under certain circumstances, but the incidents covered are very limited.
- The best way to protect your keys is to combine the use of cold and hot wallets, so that the connected wallet only contains the cryptocurrency you need at that moment.
Protect Your Bitcoins with a Cold Wallet
There are several of them good wallets to choose from to secure your cryptocurrency investments. Many of these wallets look like USB drives (some newer versions look like smartphones) and act as physical storage for your private keys. Bitcoin and other cryptocurrencies aren’t actually stored anywhere because they’re virtual. They’re ones and zeros in a database that represent ownership, each a piece of a cryptocurrency associated with a public key (the wallet address) and a private key (like a password to access the cryptocurrency). The private keys are what should be stored in a cold wallet.
Cold wallets They cannot be hacked because they are not connected to the Internet. Hardware wallets are very effective against digital thieves, but if you lose yours after transferring your private key(s), you will never recover your cryptocurrency.
Using multiple accounts and wallets may reduce your chances of becoming a target, but increases your chances of forgetting a password or losing your keys unless you are very careful.
Store your Bitcoin on an Exchange
Most transactions involving cryptocurrencies are made through a cryptocurrency exchangeThese platforms are typically accessible via a web browser or mobile application and allow users to acquire digital tokens and coins using a fiat currency or a different cryptocurrency. The problem with this approach is that you are effectively giving up control of your private keys and trusting another entity to store them for you. There are pros and cons to this.
Advantages
Storing your cryptocurrency private keys on a reputable and regulated exchange may be as safe as the cold wallet you choose, it may even be a better choice because of the insurance some provide against stolen or lost cryptocurrency. For example, Monetary base AND Twins Both offer custodial storage for their customers. Each offers enterprise-grade offline storage used by businesses and governments to securely store data.
These two exchanges even offer insurance for your assets through commercial crime insurance policies. An exchange with institutional-level security and insurance is a safe choice, but it still carries some risk.
Hacked exchanges typically have not had their security procedures reviewed or are lax in their security. If you choose this route, it is essential to do some research on the exchange to ensure that it will properly secure your assets and offer some form of protection.
Some cryptocurrency exchanges partner with institutions that hold U.S. dollar balances in custodial accounts, insuring the deposits under the FDIC. However, this protection does not extend to customer cryptocurrency balances.
Disadvantages
Some cryptocurrency security experts advise against storing any digital currency holdings on an exchange for two main reasons. First, if the exchange is violatedyou could lose your securities. Secondly, if the exchange were to close for any reason, you may not be able to get your securities back.
There is no cryptocurrency equivalent to Securities Investor Protection Corporation (SIPC)which protects clients of failed brokers from losses of up to $500,000 per account, including up to $250,000 for cash balances. Cryptocurrency wallets are also not insured by the Federal Deposit Insurance Corp. (FDIC), which provides Protection up to $250,000 for deposits at qualified banks and credit unions.
As for insuring an exchange’s assets, these policies are beneficial but very limited. For example, Gemini’s insurance only covers theft from the hot wallet they provide that results from a hack, a fraudulent transfer, or an employee stealing it. If your account username and password are compromised and stolen, you are not covered. The insurance also does not cover assets used on other wallets, so if you use a non-Gemini hot wallet to transact on the exchange and your funds are stolen, you are not covered.
Combine your Bitcoin storage methods
To protect your bitcoin and other digital assets, it is best to use a combination of methods. For example, you could keep your private keys on a cold storage device when you do not need immediate access to them. Once you decide to use them, transfer only what you need to your hot wallet or exchange.
Once the transactions are made, all keys will be placed in the cold storage device.
Assign a trading balance
Another option is to store only what you want to use in a trade on an exchange using their custodial cold storage. You could keep the majority of your holdings in cold storage and use the amount you allocate for trading. That way, if there is a hack or system failure, you only lose what was on the exchange.
Investments should be stored in cold storage
If you are buying cryptocurrency as long term investmenthoping for a price increase, there is no reason to store your private keys anywhere other than cold storage. Make sure to check it from time to time and make backups if possible. Store it in a fireproof safe or a safety deposit box for added security.
The storage system you come up with is up to you, but remember that it is always best to control your keys yourself. Finally, it is important to understand that the more convenient a storage method is, the less secure it is.
How to protect Bitcoin?
Cold wallets are the best way to protect your bitcoin because they are not accessible. Once you have transferred your keys to cold storage, only transfer what you need to your hot wallet. Also, avoid custodial storage arrangements unless you need to use them for trading purposes or want limited insurance coverage.
Where is the safest place to store your Bitcoin?
Hardware cold wallet devices they are the safest places for your private keys if they are stored in a secure environment, such as a safe. Be sure to back them up and check them regularly.
What is the best security for Bitcoin?
Preferences may vary, and there are many storage solutions. Regardless of what you choose, the best practice is to use a combination of methods, transferring only what you need to use immediately to a warm wallet or exchange.
The bottom line
Securing your bitcoin and other digital assets is not as complicated as it may seem, and there are many options available. The best practice is to use a combination of methods and only put the cryptocurrency you intend to use immediately into a hot wallet.
The comments, opinions and analyses expressed on Investopedia are for informational purposes only. Read our warranty and disclaimer for more information. As of this writing, the author owns BTC, ETH, ADA, and XRP.