So you’ve heard the buzz about cryptocurrencies and now you are eager to get into the game. Maybe you have dreams about getting rich as a Bitcoin investor, or perhaps you are just looking for an alternative form of payment when shopping online. Either way, the cryptocurrency wave marks an exciting time for fans of technology.
But like all revolutions in the internet space, security must be a top priority. Blockchain-based currencies work differently than traditional banking and credit card systems, so those new to the marketplace have to learn about the risks involved. Otherwise you will struggle to keep your money and private information safe.
This guide will walk you through the key tenets of cryptocurrency security, offering tips and strategies for becoming a smart, responsible investor.
One of the most confusing parts of blockchain technology is the sheer number of cryptocurrencies on the market today. Live Coin Watch tracks the entire crypto market in real time, with pricing and volume information for over 300 different digital currencies. For those new to crypto investing, it can be overwhelming to know which currencies are safe to purchase.
First of all, be aware that all digital currencies have the potential to be volatile at any point in time. They are not FDIC insured like normal checking and savings accounts, which means there is no governmental protection if you lose your investment or have it go down in value. All cryptocurrency investment involves a high amount of risk, especially given the novelty of the technology.
For those new to the blockchain market, it’s smart to focus your investment in one of the more established digital currencies. Bitcoin remains by far the leading cryptocurrency in terms of volume, with a total market cap of over $113 billion USD. The open source code for Bitcoin was released in 2011, with the first active trading occurring in 2013. Most analysts and experts look to Bitcoin when evaluating the current health of the digital currency market.
If you choose to look elsewhere for your digital investing, the other top traded currency is Ethereum, which has a market cap of over $21 billion USD. In general, new investors should not consider any digital currencies that have a market cap of less than $1 billion USD, as these are normally new to the marketplace and will exhibit more than average volatility.
Like with other forms of investing, there are advantages to diversifying your money into multiple streams. The only downside to doing this with cryptocurrency is that it increases the risk of a security vulnerability, as you will be forced to maintain multiple digital wallets. The best option for new investors is to stick to one well-known currency and focus on keeping it secure.
Wallet Storage – 2 Kinds to Understand
All major cryptocurrencies operate on the same basic fundamentals of blockchain technology, and the concept at the center of the system is a digital wallet. So whether you plan to invest in Bitcoin or Ether for the long haul, or just want to use some digital currency to make a single purchase, you’ll need to know how a wallet works and what steps to take to keep it secure.
The best analogy for a cryptocurrency wallet is a safety deposit box that you may rent from a local bank. With that type of physical storage, you are provided with a set of keys so that only you can unlock the box and access the contents inside. The blockchain works the same way, as each individual receives a long, unique hexadecimal string that points only to their digital wallet.
Each new cryptocurrency wallet is also assigned a secondary code, known as its public key. This string is not locked down and is essential to being able to use your wallet in online transactions. For example, when someone tries to send Bitcoin or Ethereum to you, they need to know what address to use, and that’s where you can provide them with the public key.
It’s vital to never confuse your public and private blockchain keys, as doing so can have extremely bad consequences.
You should treat your wallet’s private key like a debit card PIN, as it provides full access to all of your funds.
If a hacker is able to obtain your private key, they can steal the entire balance within your wallet.
Unfortunately, blockchain private keys are much longer and more complex than a five-digit PIN, which makes it difficult for most people to memorize. As a result, the best practice is to write down a physical copy of your private key and then store it in a secure location. Just don’t hide it too well, because if you can’t find your private key at a later time, then you won’t be able to claim any of the currency linked to the wallet. Also, whenever accessing your wallet, be sure to type the private key in very carefully, as most wallet tools will limit the number of attempts before they lock your funds permanently.
Authentication Concerns (Some Easy to Follow Rules)
Before you can even create a new digital wallet and start investing in cryptocurrencies, you’ll need to sign up for an online platform that can link traditional bank accounts to the digital marketplace. Doing so requires an email address and password just like any other website or mobile application.
If you don’t set up your credentials to be secure, then it can put your entire cryptocurrency account in jeopardy. So first of all, consider setting up a separate email address for use for blockchain purposes. If it can be one run from a private domain or server, that’s even better.
When it comes to selecting a password, most blockchain platforms will have rules in place that require you to use a unique combination of lowercase letters, uppercase letters, numbers, and symbols. Most systems do not have a limit on the size of a password, so don’t be ashamed of creating one that’s 20 or more characters long. Password generators like the one at LastPass can help you to choose a randomized string that’s highly secure.
If you prefer to select your own password, there are a few critical steps to take. First, make sure the password cannot be easily guessed. Avoid passwords that contain English words or other information related to you, like initials or birthdates. Also, your blockchain password needs to be completely unique. Do not use any password that is currently linked to other online accounts, because if another site happens to be hacked, your digital wallet will be in danger.
Most blockchain platforms include an option for multi-factor authentication (MFA), which is also known as two-factor authentication (2FA). You may already be familiar with this concept through bank accounts or email accounts that send you a text message code as you attempt to log in from a new device.
But these days, hackers have developed ways to infiltrate cell phone networks and intercept text messages, so if possible, you should look for a cryptocurrency platform that has an independent MFA tool like U2F or Google Authenticator.
Best Crypto and Bitcoin Hardware Wallets
There is an inherent danger with signing up for any web-based cryptocurrency platform. Although they make it easy to purchase Bitcoin and Ethereum credit, they also act as the virtual host of your digital wallet. So even if you take every precaution in securing your private key, there’s still a chance that the platform could be hacked and your account could still be vulnerable.
So is there any fool-proof method to storing cryptocurrency safely? By far the best solution is a hardware wallet, which is exactly what it sounds like: a physical device that has your private key embedded onto its memory. Most are shaped like normal flash drives and connect through USB ports, which will allow you to access your cryptocurrency accounts from any computer.
A big advantage of hardware wallets is that you can typically store more than one type of cryptocurrency on them. In addition, the devices themselves will often have a PIN associated with them to protect against theft. So even if you do lose your hardware wallet, another person cannot access the funds without knowledge of your code.
Local Network Security – Staying Safe When Trading
Hackers who specialize in virus or malware attacks often target individuals or communities who are active in the blockchain world. This is because by compromising a single machine, they could gain access to a digital wallet that’s worth thousands or perhaps millions of US dollars. For this reason, cryptocurrency investors must be extremely diligent in their local network security.
Using virtual private networks (VPNs) is a smart step to take before logging in to any cryptocurrency account or initiating a transaction. With a reliable VPN client, all of your communications with the public internet are fully encrypted and will block out external hacking threats.
A VPN functions like a secure tunnel between your local internet service provider (ISP) and the hosting provider. Even if an outside attacker manages to intercept data packets within the tunnel, that information will be unreadable and your digital wallet will remain safe.
Of course, a VPN connection is only as trustworthy as the hosting company that runs it. Never use free VPN services for blockchain activities, as these can be poorly run and vulnerable to attacks. Make sure you select a VPN solution that offers end-to-end encryption and full anonymity when browsing the web. This is especially important if you ever plan to access cryptocurrency resources while connected to a public wi-fi hotspot. Doing so without a secure VPN connection is risky, as your data traffic can be easily stolen by the router’s owner or external intruders.
It’s always a good idea to keep your personal computer’s software and virus scanning tools up to date, and doing so is a pivotal step in ensuring your cryptocurrency accounts remain safe. Set up your operating system and antivirus utilities to scan for new updates on a daily or weekly basis, as this will ensure that you are protected against new types of attacks right when they are discovered.
Browser and Email Monitoring (IMPORTANT)
Those new to blockchain technology need to be constantly on the lookout for phishing scams. These attacks are normally carried out through fake email messages that claim to be connected to a real cryptocurrency platform or exchange. They’ll often try to convince you that there is an issue with your account or a pending deposit that requires your confirmation.
Phishing emails will also contain a hyperlink, sometimes disguised behind generic text, that will direct you to a URL run by the hacker. In most cases, just clicking on a phishing link will not damage your digital wallet, as long as you have strong antivirus software on your computer. The real danger comes into play when a user enters information on to the fake webpage, such as their social security number, banking information, or private blockchain key. Like with other types of cryptocurrency attacks, once an outside individual has access to your private wallet key, they can withdraw your funds immediately.
To protect against these types of phishing scams, you should only access blockchain platforms through a known URL or a saved bookmark. This will ensure that you are visiting the real homepage and not a spoofed attacker’s version. In addition, always look for the lockbox symbol in the top address bar of your browser, which indicates that the site is using a valid secure sockets layer (SSL) certificate.
The presence of an SSL certificate will keep all transmissions between your browser and the website’s server fully encrypted, offering another layer of protection against attacks. If you ever navigate to a cryptocurrency site that does not have a valid SSL certificate set up, do not enter any private information and close your browser right away.
How to Backup Your Crypto Keys Safely
Before launching into any cryptocurrency transactions, you’ll want to ensure that you have an appropriate backup solution set up on your primary computer. When you first gain ownership of Bitcoin or Ethereum credit, you’ll be issued a digital file called “wallet.dat” with your private key and the details of the completed transaction.
If you only keep the original copy of the wallet.dat file, then you are at risk of losing your cryptocurrency funds in the event that your computer crashes and cannot have its hard drive recovered. This is why it’s so important to include all blockchain-related files in your backup strategy.
IT experts support the 3-2-1 approach when it comes to backups. It means keeping three separate copies of your data, storing it on two different forms of media, and transferring one backup set to an offsite location. For example, if you are storing your primary wallet.dat file on your home computer, then you should keep the primary copy on an internal hard drive, a secondary copy on an external hard drive or CD, and the third copy on a flash drive that can be stored at your office or in a safety deposit box.
Keeping backups of blockchain data can save you a lot of money if your primary version gets lost or corrupted, but just remember that with each new copy you make of your digital wallet, it creates new risk of theft. A hacker who steals your backup wallet.dat file will be able to infiltrate your account even if you still own the primary version. For this reason, you should consider investing in a secure flash drive or external hard drive which requires a security code to use.
Planning Ahead for Crypto Inheritance
You may have heard news stories about Bitcoin billionaires who have died unexpectedly and had their fortunes evaporate instantly. Even if you only own a small amount of blockchain currency, it’s still a wise idea to look ahead and make an inheritance plan.
As we’ve discussed, a digital wallet’s private key is the piece of data that provides access to cryptocurrency funds. If you have a spouse, other family member, or lawyer whom you can trust with this sensitive information, then that can provide a level of security in case of an emergency.
There are also technological solutions being offered today. For example, you can set up a dead man’s switch program on your personal computer and tie it to your Bitcoin or Ethereum account. The program will send you an email every hour or every day and ask for you to respond with a specific command. If the command is not received, then a workflow is triggered and your blockchain information will be sent to a designated heir.
Depending on what platform you use to initially set up your cryptocurrency wallet, they may offer specific inheritance options. For example, the Coinbase exchange will allow individuals to claim ownership of a family member’s wallet when a valid death certificate is provided.