Bitcoin and crypto use is growing the most in lower and middle-income countries; it is used to send remittances, preserve savings, and act as a substitute when financial services unique to the countries are hard to access.
Many products and services have been introduced which make it more convenient for those that use or are new to crypto; however, the increased rate of adoption and use has led to an increase in hacks and thefts. In its annual analysis of cryptocurrency theft, blockchain analysts at Chainalysis found that 2022 was the worst yet in terms of the totalidade value of crypto stolen—$3.8 billion.
No storage method is 100% secure, but here are some ways you can increase your bitcoin and crypto security.
- Users can lose bitcoin and other cryptocurrency tokens due to theft, computer failure, loss of access keys, and more.
- Cold storage (or offline wallets) is one of the safest methods for holding bitcoin, as these wallets are not accessible via the internet, but hot wallets are still convenient for some users.
- Those interested in the safest storage should consider using a non-custodial cold hardware wallet for all of their long-term bitcoin and cryptocurrency storage.
- Only keep what you plan to use in your hot wallet. Once you’re done with your transaction, move your crypto back to cold storage.
When you purchase bitcoin, you’re given ownership of the amount you bought. You’re given two keys—one is your public key, the other is private. The public key is used to encrypt information and create your wallet address, and the private key allows you to decrypt the information, or access your bitcoin. This is the key you’re storing and safeguarding.
Your bitcoin ownership is safely recorded, stored, validated, and encrypted on the blockchain. To date, no cryptocurrency has been stolen by altering the information on a blockchain because of the encryption methods used. With current technology, it would take centuries, if not millennia, to brute force hack a blockchain.
However, the wallet you use stores your private key, and wallets are generally software on a hardware device, which is hackable—thus, the weak link lies between the blockchain and the user.
Anything that allows you to access your bitcoin, such as third-party apps like wallets or anything else that stores or enters your keys for you, is susceptible to hacking.
Types of Storage
There are generally two types of storage, custodial and non-custodial. There are hot and cold wallets for each type.
A custodial wallet is managed by a third party, such as an exchange like Coinbase. In this arrangement, the custodian stores your private keys for you, guaranteeing their safety and sometimes providing insurance on holdings up to a certain amount. Custodial wallets like these have been the target of many attacks since users began using their services; exchanges have taken measures to harden their services, such as moving users’ keys into enterprise-level cold storage so that they cannot be accessed.
Custodial wallets can either be hot or cold.
Non-custodial wallets are those you use to store your keys with no one else involved. Non-custodial wallets can also be either hot or cold.
Hot wallets are software that stores your keys and have connections to the internet. These wallets create vulnerability because they generate the private and public keys needed to access crypto. While a hot wallet is how most users access and make transactions in bitcoin, they are vulnerable and can be hacked.
It’s estimated that about 17% of the bitcoin that will ever be in circulation has been lost—as in misplaced, keys forgotten, and so on.
A cold wallet (also called cold storage) is a wallet that is not connected to the internet; therefore, it holds far less risk of being compromised. These wallets are also called offline wallets or hardware wallets.
The Safest Bitcoin Storage
Of all the options available to you for storing your keys and securing your bitcoin, the safest methods will always be those you manage yourself without a connection to the internet.
Commercial Non-Custodial Cold Wallets
You’ll find many options available, such as the Ledger Nano X or Trezor Model T. These are usually USB connection-type drives that connect to your device. When used with safety in mind, these commercial storage methods are safer than storing your keys in the wallet on your connected device.
Many of these wallets store your private key and come with software that works in parallel to your wallet device or program. This allows you to view and use your holdings without needing to enter your private keys.
It’s important to know that many of these device advertise compatibility with DeFi applications. Chainalysis found that DeFi protocols accounted for more than 82% of all cryptocurrency hacking activity in 2022.
When choosing one of these products, you might find some with Bluetooth or other wireless options. These are also relatively safe if you can disable the connectivity after using them if they don’t automatically do so. The vulnerabilities of these wallets are the software and connections used on your device or storage media, and the fact that you have to connect them to a device that has a connection to use them.
Commercial cold wallets are also called hardware wallets.
Alternative Non-Custodial Cold Wallets
There are several methods that are safe from hackers and thieves you can use to secure your bitcoin keys. USB drives can be used just as effectively as a commercial wallet if you encrypt and safeguard them. Disconnect them when they’re not being used, store them in a secure place, make a backup, and only use them in one device for one purpose—keeping your keys.
One of the original ways to store keys was to write them down on paper and place it in a safe. This is still a secure method; however, ink can bleed, paper can deteriorate over time or be lost, or someone can steal it. If you choose this method, you should make sure only trusted people have access to the safe and check on the paper periodically.
In the past, some users used QR code generators, printed the keys and QR codes on paper, and then stored them in safes. This can still be done, but you’re allowing additional software access to your keys. Also, don’t use websites that will generate codes or anything for you—you never know how your information is being stored and used on a website, and they are notorious for being hacked or hijacked.
Back up your entire bitcoin wallet early and often. In case of a computer failure, a history of regular backups may be the only way to recover the currency in the do dedo wallet. Make sure to include all the wallet.dat files and then store the backup at multiple secure locations (like on a USB, CD, or another removable device). Additionally, ensure you use a strong password on the backup and encrypt it.
Keep your software up to date. A wallet running on non-updated bitcoin software can be a soft target for hackers. The latest version of wallet software will have updated definitions and fixes in place, thereby increasing the safety of your bitcoins. Consistently update your mobile device or computer operating systems and software to make your bitcoins safer.
The concept of a multi-signature (multi-sig) has gained some popularity; it involves transaction approval from several people (like three to five) for it to take place. This limits the threat of theft as a single controller or server cannot carry out the transactions (i.e., sending bitcoins to an address or withdrawing bitcoins). The people who can transact are decided in the beginning—when one of them wants to spend or send bitcoins, they require others in the group to approve the transaction. This is also called a shared wallet and should be used with caution.
If you have the option of using multi-sig, ensure you know the other people and trust them before joining the wallet.
Seed phrases are a series of randomly generated words that act like a master password for your wallet—it’s also called a recovery phrase, mnemonic phrase, or mnemonic seed phrase. These phrases allow you to recover your keys if you ever lose your storage devices or your access. Your keys are encrypted and a series of words are generated from that encryption that gives you access to your wallet.
A seed phrase might look like this:
spare snake rather window lab bless night west industry trap jacket absurd detect inspire need robot lift elevator able volcano one memory link goat
These words are easier to memorize and/or write down and store than the 64-digit hexadecimal keys. You can even purchase a titanium stamping kit to preserve and secure your seed phrase in your safe.
Using Your Bitcoin
When you decide it’s time to use your bitcoin, the best way to do so is to transfer only the amount you want to use from cold storage to your hot wallet. Once you’re done, move any remaining bitcoin back into cold storage.
Your hot wallet’s public address can be seen by anyone, as can the amount you have stored in it. You can see an example of this using a blockchain explorer for the crypto you use. If you don’t have anything in your wallet, you won’t draw the attention of thieves.
Is It Worth Buying a Cold Wallet?
A commercial non-custodial cold wallet is one of the safest methods for storing your keys. Considering you may be able to purchase one for about $200 to secure cryptocurrency worth far more than that, they can be worth it.
Can You Lose a Cold Wallet?
Yes. Examples of cold storage might be a piece of paper you’ve written your keys on, a device no bigger than a USB thumb drive, or one that resembles a small cell phone. These are easily misplaced, so if you have one, ensure you develop the habit of securing them in the same place every time you use them.
Can Cold Wallets Be Hacked?
Cold wallets, by definition, are not connected to the internet or another device, so they cannot be hacked. When you connect them to a device, they become vulerable.
The Bottom Line
Cryptocurrency is not losing popularity with users or thieves. Because of those that would rather steal from others than earn a living, it is necessary to store your bitcoin keys as safe as possible. Cold storage methods are the safest way to store your keys, but at some point, you will have to connect your storage device or enter your keys to use your bitcoin. Using an offline device only when you need to access and use your keys, then storing the device in a safe place are the best ways to prevent hackers from stealing your crypto.
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not own cryptocurrency.