How Do I Manage My Cryptocurrencies Securely?
By Blokkx Ltd. on Altcoin Academy
Blokkx Ltd. November 2019
Digital goods must be secured
Cryptocurrencies are digital assets for a specific value. Unlike a share certificate, a car or a gold bar, however, they cannot be stored “physically” in the same way.
This fact makes it all the more important to take all available digital security measures. Various steps are helpful in this respect.
Step 1: Remove coins from stock exchanges
Quite a few stock exchanges are victims of hacks at irregular intervals. Attackers usually take considerable sums in cryptocurrencies with them. The easiest way to secure your cryptocurrencies is to deduct unnecessary coins from the Exchanges.
But how many are unnecessary? A simple risk estimate provides orientation. If you plan to trade a lot in the coming months, you can temporarily deposit 30 or 40 percent of your coins. Anyone who is committed to a long-term holding strategy and only trades a little is more likely to need 5 to 10 percent on the stock markets. The more coins are deposited in your hedged wallets, the better.
Step 2: Select secure wallets
The selection of the most suitable wallets has a top priority for every crypto owner. At this point, it is essential to emphasize the majority. Because as with Fiat currencies, owners are better off not putting all their assets into a single wallet. This strategy spreads the risk and protects against loss (theft, broken equipment, etc.).
The extent to which a wallet is considered safe depends on various factors. Firstly, wallets can be divided into “hot” and “cold storage”. The former refers to a storage location that is continuously connected to the Internet and is therefore susceptible to hacks. The latter stands for wallets that are temporarily or not at all connected to the Internet. On the other hand, the wallet type is strongly determined by the end device used and the intended purpose.
In principle, the crypto scene classifies all wallets with cold storage as safe from hacking. This includes hardware and paper wallets. The hardware wallet works similar to a USB stick. Owners transfer access to their coins to the external device. Only when a transaction is to be triggered does the device connect to the blockchain network. But not every hardware wallet meets all security criteria and can automatically store any coins and tokens. An overview of recommended wallets can be found here.
Paper wallets, as the name implies, are made of paper. They are a tried and tested means of removing access to the coins, i.e. the private key, from the network. But this also has disadvantages. If the piece of paper containing the private key is lost, the coins will also be irrevocably removed.
For owners who buy cryptocurrencies exclusively for investment reasons and do not use them in everyday life, the combination of hardware and paper wallet plus a small deposit on exchanges is sufficient.
Online and mobile wallets are somewhat less secure but more convenient. Without them, neither stock exchanges nor mobile payment transactions are possible. The daily payment of goods is by no means the norm in the Bitcoin & Co. sector. For short-term trades, however, users should deposit a small cushion of coins in these wallets.
Step 3: Secure Wallets
To build on the fact that nothing can happen with the coins in the self-administered wallets is a fallacy. Each wallet is only as secure as the measures taken to secure it.
The first rule is to use complex passwords. Anyone who “blocks” assets of a certain monetary value with 12345 or abcde open the door to the coins to hackers. Passwords can be managed with password management programs or stored in an encrypted cloud. Also, software and wallets should be updated regularly.
All wallets have a combination of private and public keys. The key pair contains the exclusive access option for each user to the coins (individual) as well as the public “transfer address” (public). Secure storage is a top priority precisely because the private key or seed also loses the signature for transactions and the associated coins. Backup copies at different storage locations, which are offline and/or encrypted, help in the case of a loss with the recovery. In its purest form, this can even be the notepad in the closet.
If transactions require the approval of several users, it is best to set up a multi-signature variant. This permission request works similar to a joint marriage account: Only if both or more parties approve the transfer will it be executed. Many cryptocurrencies offer this option.
But the safest wallet is still the one nobody knows about. Crypto novices should, in any case, refrain from making statements about their ownership.
What if access to the cryptocurrencies is lost?
In the media, it can be heard again and again: Hard disks with the key to Bitcoin’s ability are lost, wallets have to withstand hacks due to lax security precautions or passwords are forgotten.
If the key is lost, the possibility of accessing the cryptocurrencies expires irrevocably. “Be your own bank” on the one hand brings immense financial sovereignty. On the other hand, owners, unfortunately, expose themselves to increased risk.
Testament
Cryptocurrencies are valuable objects and belong to the digital heritage. It is therefore advisable to include them in your will and leave instructions on how to access them. The latter in particular is often forgotten and has led to uncertain financial circumstances among heirs.
Future: Insurance?
Decentralization and independence from institutional bodies are the original principles of cryptocurrencies. Nevertheless, they are slowly and steadily finding their way into institutionalized finance through Bitcoin ETFs, futures and other mechanisms. The question now is to what extent insurance coverage is guaranteed.
Unlike money deposits such as overnight money or time deposits, there is no security fund or rescue parachute for cryptocurrencies. Even private household insurance would not cover the loss.
Where private investors go out empty, business people have more luck. First offerers from abroad have products meanwhile in the Portfolio. However, they are still in their infancy and only cover the fewest cases of emergency, such as employee theft. Loss due to negligence or hacking is not covered, nor are exchange rate fluctuations. All customers are obliged to make regular backups.
It will probably be some time before cryptocurrencies find their way into the private insurance sector. Here, too, it remains exciting to see whether the solutions can be implemented centrally or decentrally via blockchain applications.
