The previous article titled Private Keys & Storing Bitcoin listed a brief overview of the different ways to store cryptocurrencies such as Bitcoin. This article will discuss the ways to minimise the risk of theft to your Bitcoin wallets.
The first thing to understand about cryptocurrencies is that they are frequently stolen. Cryptocurrencies are an easy target for hackers, particularly because crypto is such a fast moving industry with newcomers who may not be tech savvy.
By far the most common way cryptocurrencies are stolen is when an exchange is hacked. In February 2014, Mt Gox, the largest Bitcoin exchange at the time, announced that 850,000 Bitcoins valued at over USD600 Billion had be stolen from their wallets. More recently, earlier this year Japanese exchange Coincheck announced that USD500 million in cryptocurrencies were stolen from their wallets.
It’s worth restating an important thought from the previous article: when you store your crypto at an exchange, you are relying on the security of that exchange. Whoever holds the private key owns the Bitcoin.
It has to be understood that cryptocurrency exchanges are hacked very frequently. When notorious bank robber Willie Sutton was once asked why he robs banks, he replied:
I rob banks because that’s where the money is.
In this age of digital assets, the exchanges are the biggest honeypots for hackers.
In short, exchanges are a terrible place to store cryptocurrencies. With that said, here are some tips on how to minimise hacks to your personal crypto wallets.
As a general rule, storing a large amount of Bitcoin on a hot wallet is ill-advised. Hot wallets are vulnerable to theft because they are constantly connected to the internet, making the wallet accessible at all times. Popular technology websites claim that around one third of all computers worldwide are infected with a virus. Therefore, extra caution must be taken when using a desktop wallet on your computer.
Although not nearly as common as a virus on a computer, mobile devices such as phones can also be virus prone. Perhaps the biggest security flaw with a mobile wallet is downloading a malicious wallet from the app store. There have been known to be scam wallets posing as legitimate wallets on the Apple and Google Play stores. So before selecting a wallet to download onto your device, it’s advised to read reviews and research the mobile wallet and the publisher.
Generally speaking, hot wallets are perfect for day-to-day Bitcoin transactions because of their ease of use and quick accessibility to your funds. However, your crypto life savings should not be stored on a hot wallet.
Paper wallets are pieces of paper which display the public and private addresses. The risk of using a paper wallet is that the private key is printed and displayed on a physical piece of paper. This makes the wallet susceptible to a physical theft.
The other risk is that paper wallets are generally created online, meaning the website of the paper wallet creator can be compromised. Most printers use wifi to communicate with a computer, which leaves printers (and the process of printing a paper wallet) vulnerable as they are always connected to the internet.
A hardware wallet is a physical device that is kept offline but has the ability to be plugged into a computer when needed. Hardware wallets are the cheapest safe solution to storing Bitcoin because the private keys are generated offline, with only the public key ever touching the internet. Furthermore, before making a transaction, a physical button on the device must be pressed to confirm the transaction before any funds can be transferred from the device.
To minimise the risk of theft, make sure to purchase the hardware wallet from a reputable merchant, most preferably directly from the manufacturer. Keep the firmware on the device up to date, follow the maker of the hardware wallet on Twitter and subscribe to their mailing list for news and updates. Always verify that any communication regarding updates are actually from the company and not a hacker claiming to be the company. Computers these days are very cheap, so it may be a good idea to purchase a designated computer purely for accessing your hardware wallet.
General Advice on Storing Bitcoin
It’s a good idea not to keep all your Bitcoin in one place. Bitcoin is all about decentralisation, so storing all your Bitcoin in a single location is not advised. A better way to hold your Bitcoin is by storing it across multiple wallets and in multiple locations.
Keep in mind that cryptocurrencies can be lost by simply losing your wallet or not backing up your wallet correctly. Make multiple paper backups of your hardware wallet (the mnemonic seed) using a pen and paper. Never make a digital copy of your recovery phrase. Remember that Bitcoin is a digital form of cash and must be treated as such.