Security-vs- Convenience: The Tradeoff
So, you’ve caught the bug that’s spreading like wildfire. You want to invest in cryptocurrencies. You aren’t phased by the extreme swings of asset values or the lack of consumer protection. If you’re ready to take the gamble on digital money there is one more risk to consider before taking the plunge. Crypto assets are particularly attractive to hackers because they can steal them anonymously. For a clever cybercriminal, they present opportunities where the rewards can outweigh the risks. So, what should you do to safeguard your money?
Don’t leave your assets on a cryptocurrency exchange
When you first buy cryptocurrencies, you will need a place to store them. Many take the easy route and keep their coins on the exchange they initially bought them from. The appeal of exchanges is clear. They are convenient and versatile; exchanges not only offer a way to store money but you can make and receive payments as well as trade on them. In many ways, exchanges operate like traditional banks. However, unlike traditional banks, exchanges aren’t backed or insured by the government, so if your money is stolen, there is no recourse for getting it back. As a result, countless people have lost their assets because the exchange couldn’t honor withdrawal requests, its operators were crooks and more often than not, it experienced a cyberattack. In fact, millions have been lost on cryptocurrency exchanges. A prime example is the hack on CoinCheck in January 2018 where investors lost more than $500 million.
The beauty of the blockchain is its decentralized nature. Why leave your money on a centralized platform where you have no control over it? Trade convenience for security and move your money off of the exchange and onto a proper crypto wallet.
Get a secure crypto wallet
Unlike your real-world wallet, a crypto wallet doesn’t actually store your digital money. A crypto wallet stores your private key (similar to a PIN number on your debit card) and public key (similar to your bank account number). Using algorithms, it allows you to send, receive and track your digital assets which are traceable via the blockchain network.
There are different kinds of wallets in the marketplace and some are more secure than others. I won’t dive into the details of wallets and wallet types here. If you need a layman explanation of the various types of wallets read The Definitive Guide to Crypto Wallets. For the purpose of this post I’ll broadly label cold wallets (hardware and paper wallets) as more secure than hot wallets (online, mobile and desktop wallets). Cold wallets store the public and private keys offline. This makes them ideal for long term storage yet a hassle to use on daily basis. On the contrary, hot wallets store the crypto keys online which makes them both handy and hackable at the same time. In short, your money will be safer if you store your keys in a hardware or paper wallet but the tradeoff will be that aren’t the most convenient wallets for making transactions (paper wallets are far more cumbersome in this respect than hardware wallets).
Take caution when online
While cold wallets are decidedly more secure, there may be times when you will need to use a hot wallet. If you are going to use a hot wallet, minimize your risks by taking these steps:
• Download official wallets only from the official or authorized web site • Encrypt your wallet and create a strong unique password • Use two-factor authentication when possible • Use your hot wallet (which includes exchange accounts) only for small, short term transactions
Protect your private key
Always choose security over convenience when it comes to your private key. If you’re one of those people who takes pictures of everything on their cell phone (because it’s a fast and easy way to get the info you need) make your private key the exception. When it comes to your private key, taking a photo of it is a BAD idea.
Your private key is used to verify your account and your transactions. Anyone who has access to your private key has access to your money (regardless of the type of wallet you have). Think of your private key as the key to your safe deposit box. Would you give someone else the key to your safe? Take extra steps to protect it and keep it a secret. Otherwise you run the risk of losing your money …forever.
Backup your wallet
Creating a backup of your wallet is a critical step towards safeguarding your money. Taking the time required to do a backup may seem bothersome but it’s an acceptable level of inconvenience when you consider the consequences of not doing it. It may be the only way you can recover your private key in the event of accidental loss or theft.
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