Protect Your Bitcoins Against Theft and Hacks

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Protect Your Bitcoins Against Theft and Hacks

How Do You Protect Your Bitcoins Against Theft and Hacks?

Despite the fact that the bitcoin business has just recently entered the mainstream, it has already developed a narrative that has become virtually formulaic. A harmful hack is perpetrated on a person or, maybe, a digital currency exchange.

As a consequence, a significant amount of digital money is lost. The hackers seem to evaporate into the emptiness of online anonymity, leaving behind digital assets that are hard to track down or retrieve.

Key Takeaways

  • While the cryptocurrency market evolves at an incredible rate, so are the hacking tactics employed by hackers to steal digital money.
  • To protect their bitcoin assets, prudent investors should take steps.
  • A cryptocurrency wallet is one of the finest security methods; “cold storage” wallets look like USB sticks and are not linked to the internet to protect their bitcoin contents from attacks.
  • Security experts advise against storing cryptocurrencies on digital currency exchanges.

Cold Wallets Are Key

Many investors would purchase a popular digital currency, such as Bitcoin or Ether, via an exchange merely to retain the money on that platform. Although digital exchanges take efforts to minimize theft, they are not immune to hackers.

Keeping a wallet safe is one of the finest strategies to protect your investment. There are two kinds of bitcoin wallets. The safest choice is “cold storage” or “cold wallet” hardware devices.

These wallets resemble USB devices and serve as physical storage for tokens or money. Cold wallets cannot be hacked online since they are not linked to the internet. Each hardware wallet has a private key, which is a password-like piece of code that decrypts the wallet and grants access to the coins or tokens it keeps. While physical wallets are very successful against digital criminals, they come with a new risk: If you lose your password key, you will never be able to restore the contents of your wallet.

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Other Types of Wallets

Those who are concerned about storing digital cash on a device that might be stolen or lost can utilize secure online wallets instead.

Online wallets, like cold wallets, feature private keys that are unrecoverable if lost, thus it’s critical that you keep your private key in a safe spot that you’ll remember. Individuals have gone to great lengths to protect their keys, such as storing them in safe deposit boxes or encrypting them in graphic files. Some users have had crucial information tattooed on their bodies.

Paper wallets are a subset of internet wallets. Web applications such as BitAddress or WalletGenerator produce them. These programs generate Bitcoin addresses and private keys, which may subsequently be printed. When the key for the paper wallet is produced, it is deleted from the online wallet and network. The CryptoHex wallet goes a step further by imprinting the key information on a metal strip.

Desktop wallets are an additional alternative. They do not have a direct connection to the internet. However, since there are viruses intended to obtain information for these wallets from a desktop computer, such wallets may not be as secure as the solutions discussed above.

Digital Currency Exchanges

The majority of cryptocurrency transactions take place via a digital currency exchange. These platforms, which are often accessed via a web browser or a mobile application, enable users to purchase tokens and digital currencies using either fiat cash or another cryptocurrency.

For two main reasons, cryptocurrency security experts advise against maintaining any digital currency assets on an exchange. For starters, if the exchange is hacked, you may lose your investments. Second, if the exchange fails for whatever reason, you may not be able to recover your assets.

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The Securities Investor Protection Corporation (SIPC), which protects customers of bankrupt brokerages against losses of up to $500,000 per account, including up to $250,000 for cash assets, does not exist in cryptocurrencies. Furthermore, no cryptocurrency wallet is directly protected by the Federal Deposit Insurance Corp. (FDIC), which offers up to $250,000 in deposit insurance for eligible banks and credit unions.

Instead, several cryptocurrency exchanges allow users to keep their US dollar holdings in linked accounts at FDIC-insured partner banks. However, this protection does not apply to client crypto holdings.

Exchanges use a combination of security safeguards and insurance coverage to protect their clients’ bitcoin assets. FTX US, for example, claims to retain the majority of its customers’ digital assets in cold storage at BitGo Trust, an institutional digital custody provider that guarantees up to $250 million in insurance coverage against the theft or loss of private keys it possesses. The exchange’s $7.5 million “primary crime insurance coverage” from AON Plc (AON), the London-based insurance broker and risk expert, covers FTX US customer crypto assets housed in “warm” or “hot” digital wallets accessible online.

Although knowledgeable cryptocurrency investors often take their assets off the exchange platform after a transaction is done, investing on a digital currency exchange still involves custody risk. This emphasizes the need of properly selecting one’s transaction.

Popular digital currencies such as Bitcoin, Ether, Cardano, and Ripple may be purchased on a number of crypto exchanges. These providers are not all the same in terms of safety and security; the investor must do some due diligence to ensure that they are not taking excessive risks in the transaction process by operating on an unsafe exchange.

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Other digital currencies, especially ones that are less popular or newer to the market, may have fewer exchange alternatives. However, it is advised to avoid an exchange if it seems to lack security or cannot persuasively explain how it preserves customer assets.

Investing in cryptocurrencies and Initial Coin Offerings (“ICOs”) is very dangerous and speculative, and this article is not a suggestion by Investopedia or the writer to do so. Because every person’s circumstance is different, a knowledgeable specialist should always be contacted before making any financial choices. Investopedia makes no guarantees or warranties about the accuracy or timeliness of the information provided on this site. The author owns Bitcoin, Ethereum, Cardano, and Ripple as of the day this post was published.

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