As recently as last week, hackers yet again cleared over $150,000 in Ether from wallets. While this was a relatively small amount compared to other hacks, it spurs anxiety about the safety of coin wallets. The headlines may be unsettling for new entrants involved in the cryptosphere.
However, the situation isn’t hopeless. In many cases involving hacks, if better precautions were taken, those investments would have been safe. The key to taking those precautions involves having a better understanding of how cryptocurrency storage works.
Despite all the stock footage of stacked gold coins with giant “B’s” etched into the surface, cryptocurrency isn’t a physical object. It’s an entry into an encrypted, immutable ledger. Your wallet doesn’t hold coins because there are no coins to hold. What it does hold are ways to access the “proof” that you have ownership of those coins, of that value.
The way you access this proof is through keys, and this is what’s actually stored in your wallet.
Sending and receiving crypto involves two keys: a public key and a private key. Your public key is what allows people to send you crypto.
You could, in theory, walk down the street and hand out this key to everyone you met, and it would be no different than giving people your bank account and routing number. The only thing people can do with that information is send you money.
Your private key is different. This is the key you use to push transactions on the blockchain. The security of this key is vital.
While it’s mostly harmless if someone has your bank account number, if someone has your debt card and your PIN number, that’s a very different scenario. With those numbers, they could essentially wreak havoc on your finances.
The most alluring aspect of cryptocurrencies can also be a devastating double-edged sword if you’re not careful.
It’s About More Than Protecting Your Private Key
With the multitude of news stories detailing hackers draining wallets dry, you might think that half the people who invest in cryptocurrencies simply leave their private key pinned to the office refrigerator with a magnet. But it’s a little more complicated than that. You can keep your key safe and still be vulnerable to hackers. The reason for this rests in the different types of wallets and their weaknesses.
Types of Wallets
There are five different types of wallets. Each one has their security strengths and weaknesses. None of them is 100 percent safe. These are the types of wallets and their vulnerabilities:
Cloud Wallet: These are the least secure wallets, easy to access, easy to hack. Why do people use them then? They’re a default wallet, attractive to new investors with limited knowledge on crypto storage and who also trust their exchange to secure their investment.
Additionally, they are what is known as a hot wallet, a type of wallet used for rapid transactions due to minimal security. Because of the weaker security and centralized nature of exchanges, hackers can direct their efforts and successfully steal millions.
Desktop Wallet: More secure than cloud wallets, they still have flaws. Connecting a desktop to the internet puts your wallet at risk. It is the constant connectivity of cryptocurrencies that increases the risk of an attack by a hacker. A hard drive crash or an unfortunate event, like a flood, could result in a complete loss of your investment as well. That said, some desktop wallets are a necessity to help secure blockchain ledgers.
Mobile Wallet: These are designed for day to day purchases and quick spending but should only be used for petty cash. The downside is that if you lose your phone and you didn’t back up keys, your investment could be lost as well.
Paper Wallet: These are a printed copy of your private key. It can’t be hacked and can’t malfunction. But it can still be lost or destroyed by other means. It’s similar to storing your money underneath the mattress, your money is secure unless your house burns down.
Hardware Wallet: These tend to be the most secure because they isolate your private keys from the internet. Most hardware wallets have a backup seed to restore the wallet in case of loss and are password protected from thieves.
All Hope Is Not Lost
You need to take the right precautions to protect your investment. This is true for anything of value. This is why banks employ armed guards, build safes, and use high-tech alarm systems to protect their assets. Luckily, there are steps to take to secure your crypto as well.
Don’t Put All Your Eggs in One Basket
There are five different types of wallets, don’t stick with one. There have been people who put their entire investment into one exchange or one desktop wallet only to find it completely gone when that account was hacked. Spread out your investment. Use a combination of wallets to make sure if the security on one is breached, the rest of your assets will remain protected.
Windows Security Essentials Won’t Cut it
Having secure, private code means nothing if your computer is flooded with malware and spyware. A bot can simply scoop up your private key and drain you of your investment. If you have a desktop wallet, invest in strong internet security to make sure that any transactions you complete aren’t being monitored. Operating systems such as Linux tend to be more secure than Windows.
Don’t Make It Easy
There are other levels of security you can add to your wallet to further protect your keys. 2-Factor Authentication is a great additional security feature that strengthens your accounts on exchanges and helps prevent hacking. When you log onto an exchange it’ll require an additional PIN from your phone to confirm your identity before allowing access.
If you lose your private key and you have no back up of it, those assets are gone. They will remain on the blockchain for eternity, unable to be used. The only thing worse than having your money stolen by a hacker is knowing exactly where it is but being unable to access it. Have contingency plans. Don’t let one, small fire wipe out all your investment.
The Responsibility Is on You
The beauty of decentralization comes at a price. There’s no bank to protect you, no central authority to hunt down hackers, no one to call in the middle of the night when you realize your funds are gone. You need to take the proper steps to make sure your crypto remains protected. Hackers target those unfamiliar with the tech. A few extra steps and securities will keep your investment secure.