Options For Securing Your Crypto Currency Portfolio
previous article — https://medium.com/@edtrem_55994/crypto-assets-treasure-maps-and-the-wild-west-849f37ca4656
The threat of malicious people accessing the keys that control the ownership of crypto currencies like Bitcoin is very real. If you had a stack of $100 bills and that stack was lost or stolen, you would have a very difficult time proving that you owned that stack of money. In this example, possession is 9/10ths of the law — meaning whoever possesses the stack of bills is the owner. In the case of a crypto currency like Bitcoin, whoever “possesses” the private key used to sign a transaction on a blockchain ledger is considered the “owner” of the amount of that transaction.
WALLETS
The metaphor used for a secure store of crypto currency’s private keys is a ‘wallet’. It is ironic that “wallet” is used to describe a secure store for wealth, given that wallets are notoriously insecure due to theft by pickpockets, losing your wallet at happy hour, etc. If someone breaks into a wallet, they will have access to the private keys stored there. Crypto currency “wallets” fall into the following categories:
Less Secure Rapid Access Online Wallets:
Exchange Wallets — On line wallets are accessible via a browser for crypto currencies held at exchanges. For example, on Coinbase there is a wallet for each of their supported coins (Bitcoin, Ethereum, Litecoin) that you can access from Chrome or Safari.
Desktop Wallets — An app that stores private keys on your personal computer. Examples of popular desktop wallets are Exodus and Electrum but there are many different desktop wallets to choose from (see list of wallets).
Mobile Wallets — Apps like Bread and Mycelium that store private keys on your smartphone (see list of wallets).
Highly Secure Offline Wallets:
Vaults — An exchange’s ‘offline wallet’. For example, at Coinbase you can optionally use a “vault” to store your private keys. The vault keeps the private keys offline in ‘cold storage’ and adds a time delay for withdrawals adding multiple layers of security for the crypto assets held there.
Hardware Wallets — USB devices that are used with your personal computer to securely store private keys offline. Popular hardware wallets are Trezor and Ledger Nano S.
Paper & Brain Wallets — Paper and Brain wallets are “offline” wallets which are tricky to understand (check out this Tutorial). What paper and brain wallets refer to are a public / private key pair generated by an app with the private key stored offline. The user typically saves the keys by printing them on paper. You can transfer any amount of crypto currency to the public key address of the paper wallet. The main idea of paper wallets is having the private keys exist off line and on paper makes them close to impossible for hacker to steal via the Internet. There are apps that generate paper wallets for Bitcoin, Litecoin, Ethereum and for many other currencies.
Multi Signature wallets — Multi-signature wallets require multiple private key signatures to authorize a transaction. For example, if you wanted to transfer digital currency you would first need to authorize/sign the transaction, and then another trusted person would also need to authorize/sign it. This way neither you or any other person can make a transaction on your own.
CREATE YOUR SECURITY PLAN
Your crypto currency portfolio needs to be managed along these tangents:
1. Highly Secure — preventing the value of your crypto currencies from getting ripped off or confiscated.
2. Always Retrievable — enabling you to successfully retrieve the value of your crypto currencies from any of the security technologies used as part of your security plan.
3. Rapidly Accessible — providing quick access for the percentage of your crypto currencies that you plan to use for trading or making purchases
To create your crypto currency security plan (i.e. your “treasure map”) you need to start by determining the percentage of your crypto currency portfolio you want to have rapidly accessible. If you are trading crypto currencies often or plan to use crypto currencies for purchasing items, you will want to have a percentage of your crypto currencies in a wallet technology that provides rapid access. For the portion of your portfolio that does not require rapid access, those private keys are held offline in ‘cold storage’.
Once you have decided on the percentage of rapid access you require for your portfolio, you can decide which of the various wallet technologies will work for you. It is likely your plan will use more than one of these technologies:
1. Online, Desktop or Mobile Wallet: For crypto currency you want immediate access to, you can store an amount of crypto currency value in an exchange’s online wallet, or directly control the currencies private keys in a desktop wallet or mobile wallet(s).
2. Exchange Vault: For crypto currency you do not require rapid access to and you want to keep the control of your crypto currency safe without directly managing private key storage yourself, you can store your crypto currency in an exchange’s offline vault.
3. Paper or Hardware Wallet: For crypto currency you do not require rapid access to and you are either concerned about online hacking or about a financial institution controlling your crypto currencies, you can directly control your private keys offline in a paper or hardware wallet.
WARNING: No matter what method you use to control ownership of your private keys, you must always be able to retrieve the keys without failure. There are so many options to configure security that it is easy to make access so secure that nobody, including yourself, can ever access the private keys (see: 25% of Bitcoins are lost forever). Referring to the Wild West analogy, this would be like creating a treasure map, burying a box of gold coins in the desert…and then not being able to follow the treasure map’s instructions to retrieve your stash of coins.
Following a security plan that prioritizes control, security, accessibility and retrievability will enable you to control the proper level of security and the successful retrieval of the value of your crypto currencies whne you need access.
For next steps and recommendations for evaluating your security options see article “Being the Chief Security Officer for your own Crypto Currency Portfolio”
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