How To Keep Your Cryptocurrency Secure
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Bitcoin was outlined in a 2009 whitepaper by pseudonymous creator Satoshi Nakamoto. Since that time, adoption of blockchain as a technology and as a currency has rapidly increased. While the unknown creator has since stopped directly overseeing the project, the core principles of cryptocurrency as an incorruptible and anonymous transactional service remain.
Cryptocurrency is only as secure as its storage method, and the recent hack of Korean exchange Coinrail is further proof that the unregulated nature of crypto demands a greater appreciation of security on behalf of the individual. This is not the only cryptocurrency hack, as veterans of the crypto scene will still remember the colossal Mt.Gox hack of 2014 in which over 850,000 bitcoins (now valued at $5.5B+) were found to have been stolen from the largest exchange at the time. Because of these historical precedents, I have attempted to focus on how individuals can personally manage their cryptocurrency wallets and insulate themselves from malicious activity.
Public & Private Keys
While concepts of security and immutability might conjure up images of bank vaults and underground bunkers, security in blockchain is somewhat different. Because you cannot physically hold your cryptocurrency, the component you are securing instead are the keys to your portfolio. In addition, the decentralised nature of blockchain means that should you transfer the wrong person — or worse, be hacked — there is no central authority like a bank to rollback the events.
Every wallet will have core components — the public key and private key. Although both take the form of a long string of alphanumeric digits, public keys are broadcast on the blockchain and required to transfer funds to, while private keys are very private and used to prove that a transaction is legitimate. One way to think of it is that public keys act as your bank account number, whereas your private key is your PIN code. Because of this, it is the private key that is necessary to store properly, as a lost private key will result in the irreversible loss of funds in that wallet since there is no bank to give you another PIN code.
For a very basic example of the idea, i’ve included an excerpt from Comodo’s explanation on Public & Private Keys.
For example, if Bob wants to send sensitive data to Alice, and wants to be sure that only Alice may be able to read it, he will encrypt the data with Alice’s Public Key. Only Alice has access to her corresponding Private Key and as a result is the only person with the capability of decrypting the encrypted data back into its original form. As only Alice has access to her Private Key, it is possible that only Alice can decrypt the encrypted data. Even if someone else gains access to the encrypted data, it will remain confidential as they should not have access to Alice’s Private Key.
Cryptocurrency Storage Options
Ensuring that you have complete control over your wallet is essential to insuring your funds long-term. While it may seem easier to just leave the majority of your digital coins or tokens on the exchanges you bought (or trade) them on, leaving them in the hands of companies leaves them susceptible to being taken. This is because a centralised exchange, from the biggest Coinbase all the way to the smallest exchange, is not without security breaches. And in those breaches, anything stored by the company on behalf of users (i.e. you) is potentially at-risk.
Moving your funds from an exchange to a wallet typically as easy as logging on to the exchange and withdrawing funds from your account (assuming the particular exchange supports the coin/token you are dealing with).
While proponents of the technology speak highly of its security features, it is worth noting that cryptocurrency is only secure in the hands of individuals who know what they are doing. While this sounds intimidating, it is actually relatively easy to secure your ‘magic internet money’ with peace of mind. Exactly how you secure it depends on how accessible you want to make your portfolio, but a general rule to keep in mind is that every increase in accessibility decreases the overall security of the storage.
Which type of wallet you choose will ultimately depend upon your exact needs, but I have endeavoured to create explanations both for and against each method below (note that where possible I have prioritised wallets that have multi-coin functionality over solely catering to one coin/token):
Mobile — Mobile wallets are accessible via your smartphone, and provide a very accessible avenue to your keys and portfolio. The flipside of this accessibility is that if your phone is stolen or the centralised app itself is compromised, then you could be at risk.
Popular mobile wallets include:
Desktop — A desktop wallet is downloadable software that allows you to store your keys in an encrypted format on your local hard drive. While this format allows for the most additional user options (including mining), it is inherently tied to the one device and suffers the same security compromises as mobile wallets.
Popular desktop wallets include:
Hardware — Hardware wallets are specialised hardware (think USB drives) for keeping your keys safe. Hardware wallets are incredibly portable due to their size, and can offer just as many features as their mobile and physical counterparts. The downside, however, is price. Most of the popular models on the market range between $50 and $200, price-points that won’t dissuade serious traders but might water the eyes of beginners.
Popular hardware wallets include:
Paper — Storing your keys in a paper wallet means storing them offline. Once you have generated your keys anonymously (LINK), you write down the keys on a piece of paper and store them in at least one secure location. Remember that should these copies be destroyed or damaged, there is no way to get back into your portfolio.
Once you’ve written down the keys, you will need to manually retrieve them and use them in conjunction with software such as MyEtherWallet.
At the end of the day, what wallet you choose will come down to your preferred ratio of security, comfort, utility, and cost. What works for one of your friends might not work for you, and so it is imperative that you do further research on any application or hardware you’re thinking of buying.
What Now?
So you’ve successfully stored your keys. Or at least, you now know how to. Now that the safety basics are sorted, you can begin to dip your toes into the space. It’s up to you whether that means purchasing a select few cryptocurrencies and hodling for the near-future, participating in promising ICOs, or even day trading.
At the end of the day, it is important to remember that the security of the blockchain relies on your ability to be secure. Complex encryption and fancy hardware wallets don’t count for anything if you misplace your hardware or send your crypto to the wrong address.
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