The launch of the Bitcoin network in 2009 was a highly disruptive event that, for the first time, allowed individuals to “be their own bank.” Rather than entrust stored capital to centralised institutions, Bitcoin allows cryptocurrency users to remain in full control of their finances at all times.
Users of Bitcoin and cryptocurrencies are responsible for the storage, transmission, and — for crypto enthusiasts running blockchain nodes — the maintenance of cryptocurrency networks themselves. With great power, however, comes great responsibility.
Ensuring your cryptocurrency is stored securely is essential. In this guide, we’ll break down the most secure methods of storing your cryptocurrency and protecting it from hackers.
Why is Cryptocurrency Security Important?
Cryptocurrency provides users with sovereign authority over their finances but also forces them to take care of their own cryptocurrency security. Cryptocurrencies can be stored in many different ways, but all cryptocurrencies share a common factor: cryptocurrency is stored in wallets, which are accessed with a single private key and represented by a public key.
Public keys are used to send and receive transactions, whereas private keys are used to access and transact from a cryptocurrency wallet. All a cryptocurrency user needs to open a crypto wallet and spend the funds inside its private key.
It’s no surprise that over $1.7 billion worth of cryptocurrency is stolen every year — hackers and bad actors use a wide variety of different techniques to access cryptocurrency wallets and steal the funds they contain.
Some cryptocurrency storage methods are riskier than others. Cryptocurrency holders and traders that store their crypto on exchanges are far more likely to lose their capital when compared to users that store cryptocurrency locally on devices that aren’t connected to the internet.
International cybersecurity firm IB Group data reveals that over $1 billion in cryptocurrency was stolen from cryptocurrency exchanges in 2018 alone, with large-scale hacks such as the hack of Japanese exchange Coincheck resulting in the loss of over $500 million.
Further data published by IB Group indicates users that store cryptocurrency on exchanges don't take cryptocurrency security seriously — over 20 percent of all crypto exchange users choose passwords that are shorter than 8 characters.
There are five key steps you can take to minimize the risk of losing your cryptocurrency to hackers or fraudsters:
1. Use a Secure Cryptocurrency Wallet
The storage method you use to secure your cryptocurrency is the most important factor in keeping it safe. At the fundamental level, cryptocurrency wallets are a pair of keys — a public key, and a private key.
There are two different types of cryptocurrency wallets: hot wallets and cold wallets. Hot wallets are online or hosted wallets that are provided by exchanges or other trade platforms. These wallets typically don’t provide users with access to their private keys. When the platform that hosts your hot wallet becomes compromised, it’s highly likely that you will lose your cryptocurrency.
Cold wallets are cryptocurrency wallets that are disconnected from the internet. Some cold wallets, such as software wallets, are installed on smartphones or computers. These solutions are more secure than hot wallets but can still be compromised if the device on which they are becomes compromised.
Hardware wallets are the most secure form of cold wallets. Hardware wallets are specialized devices that are purposefully designed to remain offline and store cryptocurrency, and never reveal private keys — even to the owner of the device. Secure hardware wallets are manufactured by companies such as Trezor or Ledger and are typically available through platforms just like Coinstop.
2. Remain Vigilant Against Phishing Scams
Phishing is a common technique used by cryptocurrency hackers to access the wallets of cryptocurrency holders. Hackers targeting cryptocurrency holders will attempt to trick users into providing their login details for cryptocurrency exchanges and other “hot” wallet platforms and then drain their accounts.
Some phishing scams are executed via email and attempt to trick cryptocurrency holders into resetting their exchange passwords via fraudulent links. Other phishing scams involve fake iOS or android smartphone applications that attempt to steal the login details of users.
When you’re using a cryptocurrency exchange, always confirm that the URL of the platform is correct before logging in. Emails should be verified before answering — never reset your exchange password via unsolicited emails.
3. Don’t Store Your Cryptocurrency on Exchanges
Some cryptocurrency exchanges, such as Binance, are highly secure and provide users with a guarantee that their funds will be secure. Regardless of the security level of the platform you’re using, however, it’s important not to store your crypto on any exchange over the long term.
Billions of dollars have been hacked from exchanges since the launch of the Bitcoin network in 2009. Ledger, a major hardware wallet manufacturer, provides a chronological list of all cryptocurrency exchange hacks that illustrates how risky it is to store your crypto on an exchange.
When trading cryptocurrency on an exchange it’s best to keep your crypto on a hardware wallet and transfer it on or off the exchange during trading times as needed. Storing your crypto on exchanges can also make it difficult to track your cryptocurrency tax reporting. For more information on crypto tax reporting, see the Fullstack guide on Keeping Cryptocurrency Records.
4. Use a Strong Password & Lock Down Your Public Information
Simple passwords are very easy for hackers to crack. Data scientist and cybersecurity expert Troy Hunt has published data that reveals more than 86 percent of all passwords are “terrible” and can be cracked in minutes by dedicated hackers. Complex passwords such as those created by Strong Password Generator should be used when creating exchange accounts.
Some hackers are able to break into exchange platforms accounts by impersonating the holder of the account. For this reason, it’s important to lock down the information that is publicly available about you online.
5. Enable Two-Factor Authentication
Many cryptocurrency exchanges and trading platforms allow users to enable two-factor authentication, which adds another layer of security before an account holder can log in. Two-factor authentication forces users to verify logins on another device — without access to the authentication device, hackers can’t access hot wallets.
SMS-based two-factor authentication is insufficient when compared to app-based two-factor authentication such as Google Authenticator. Dedicated hackers may attempt to “sim-swap” a user account, redirecting confirmation texts to another number by misrepresenting themselves to telecommunications providers.
Key Takeaways
Cryptocurrency security should be taken very seriously. In the event that your cryptocurrency wallet or exchange account is compromised, it’s highly unlikely that you will be able to recover lost funds.
By setting strong passwords, enabling two-factor authentication, and storing cryptocurrency in hardware wallets, you can ensure that your cryptocurrency remains secure and out of the hands of hackers.
Securely storing cryptocurrency over the long term can often result in significant financial gains & incur tax obligations. If you’re not sure what the best practice is for managing your crypto tax returns, reach out to Fullstack today.