Be Your Own Bank! Protect Your Crypto Currency Assets from Hackers
Securing Crypto Assets Using Cold Storage Wallets
There has been mass distrust within the Crypto Community in response to the recent attacks targeting South Koreas largest crypto exchange (Bithumb). Large Insurance companies are becoming more skeptical in their decisions to insure reputable crypto exchanges around the globe. The Korean Blockchain Association was close to striking a deal that included insuring many exchanges in the region, but in the wake of the recent attacks, the insurance companies are having their second thoughts.
Fortunately, crypto currencies are intrinsically designed to cut out the middleman. Long term asset holders and crypto traders do not need to have their coins tied up in banks or insured by any insurance company. They simply need to store the digital currency offline in what is called a cold storage wallet. While I am an advocate of insuring one’s assets to mitigate the risk of theft or corruption, crypto currency is inherently safe and almost impossible to hack when stored offline in “cold” storage. There have been no known reports of hackers compromising the safety of one’s coins when they are properly stored.
The security is built within the blockchain by only allowing a person to access their coins when they have their private key. This level of security is compromised when the coins are stored online in currency exchanges due to the fact that exchanges need the private key to facilitate transactions. The private key is built into the blockchain protocol to verify transaction on the distributed ledger. The user “signs” the transaction coming from their public key (similar to an IP address) with their private key for the transaction to be verified and recorded on the blockchain. This is my Uber simplification of the protocol and more can be found out by exploring other articles on the private and public keys of the blockchain.
All that you need to know is that when crypto currency assets are stored off exchanges and inside a cold storage wallet they are safe from theft from outside attacks because they are offline and protected by a layer of security that requires the user to have a unique key to access. With that being said, there is still some risk involved. I will discuss three different methods to store your currency and the relative advantages and disadvantages of such methods.
1. Paper Wallets
Bitcoin Paper Wallets act as a form of traditional cash and are a safe method of storing coins. These wallets can be printed online using a Bitcoin key generator that assigns the user a printable QR code containing their public and private keys. The paper is then folded to cover the private key information and hologram tape can be purchased online for an added layer of security. The tape is highly reflective to prevent candling and causes irreversible damage to the tape when lifted or tampered with. Additionally the wallets can be generated offline using a bootable CD produced by Ubuntu to minimize risk of private key exposure online. However some trust must be placed in the printer used. A quick tutorial video can be viewed to observe the process of printing a paper wallet.
Paper wallets are a form of cold storage that is free to use, easy to carry, and can easily be sent to a friend through the mail. They however run the risk of being stolen, getting wet, being burnt, and other risks that are also associated with carrying large amounts of cash.
2. Hardware Wallets
Hardware wallets are a physical piece of hardware, similar to a USB drive, that hold the users private keys and are considered the most secure way to store coins. I do not recommend using a USB drive to export and save private keys due to the fact that anyone who has access to it can steal the information inside and often USB drives are prone to corruption and breaking. The biggest advantage of using a hardware wallet is that the signature (private key verification) is being performed on a closed off separated device that restricts the types of commands that can be interpreted by the CPU on the device. This prevents a computer that is virus ridden from stealing any of your information. I personally use the Ledger Nano S to store my bitcoin, but can be quite a bit of an expense, priced at $100.
The advantages of using a hardware wallet as a form of cold storage for crypto currencies is that they are secure, durable, supports multiple currencies, cant be copied, and can be backed up using a seed phrase in the event the device breaks or is stolen.
3. Desktop Wallets
Desktop wallets are offline cold storage wallets but instead of being tangible wallets they are hosted by your own computer. This naturally makes them the least secure form of cold storage and are vulnerable to malware attacks such as keyloggers or ransomware viruses.
The desktop wallet is only as secure as the computer it is being hosted on but is still considerably safer than storing coins in a “hot” wallet, such as those hosted on exchange servers.
After reading this I hope you have a better understanding of how to securely store cryptocurrency. It is exciting to know that banks are no longer needed as a financial intermediary and that when the right knowledge is acquired your assets can be used and stored safely. There are many different wallets out there for many different cryptocurrencies. I encourage someone searching for a wallet to do their own research on the security and reputability of the wallet. I will provide a chart showing some well known wallets for several different cryptocurrencies.
- Josef S Löffler