Cryptocurrencies in simpler terms mean decentralized digital money that uses Blockchain technology. In 2009 the first cryptocurrency, Bitcoin came into existence. Even today it is the largest, most influential, and most well-known cryptocurrency. In recent years, cryptocurrencies like Bitcoin and Ethereum have gained a reputation as digital alternatives to government-issued money.
The main concern of new investors is “How to store Bitcoin safely”? And we will address the same in this article.
What is the primary use of Bitcoin?
If you are new to Cryptocurrencies, I am sure you have this question on your mind. How do I buy, use and most importanty how to store Bitcoin safely?
Well here is the answer. You can transfer Bitcoin online without the help of intermediaries such as banks. You can also share it around the world, in real-time, and at low fees.
Bitcoin & other cryptocurrencies are not issued or controlled by governments or other central authorities. They are managed by peer-to-peer computer networks with free, open-source software. In mere principle, you can own them.
Accordingly, you can use Bitcoin for sending and receiving payments from others. You can buy or sell commodities just like you do with your traditional money.
Who or what guarantees the security of cryptocurrencies if there are no banks or government agencies behind them?
Cryptocurrencies are safe because all transactions are verified using a technology called a blockchain.
The blockchain of a cryptocurrency is comparable to the balance sheet or ledger of a bank. Each currency has its own blockchain. It is a continuous, re-examined register that records every single transaction made with that currency.
Unlike a bank’s ledger, the cryptocurrency blockchain is shared among all participants in the digital currency network.
No company, country, or third party controls this network and anyone can become part of it. A blockchain is a breakthrough technology that has only recently become available and is the result of decades of innovation in computer science and mathematics.
Most, people are gaining full control over their wealth with the help of cryptocurrencies
Why does digital money like Bitcoin need protection?
Storing cryptocurrencies is like storing your traditional money. This means you need to protect them from theft and loss. There are many ways to store bitcoin both online and offline. However, the simplest way to store is with trusted Exchanges like Kucoin, Binance, Huobi, etc. We will come to the other ways shortly.
How to protect & store Bitcoin safely
As digital assets, cryptocurrencies have a certain value. We can keep Stock certificates, cars, or gold bars “physically” but not cryptocurrencies.
We should keep digital possessions safe in wallets against attacks and theft just like the bank lockers and safe. It is all the more important to take all available security measures. The following steps are helpful for this.
Step 1: Determine preference
For years, crypto fans followed a simple rule of thumb. Owners must withdraw any coins they do not need from the exchanges. There were always enough coins in the crypto exchange wallets to be able to carry out planned purchases and sales.
The limitation to the least in these wallets was due to the fact that exchanges became victims of hacks at irregular intervals and attackers stole considerable sums of money.
This picture has now changed. Most exchanges have invested to secure their systems, for example by introducing cold storage.
For owners, this means that they should be aware of their own preferences. Do they prefer to have a large pool of coins ready for spontaneous trades on the exchanges? Would you like to use your coins without any intermediate step, for example, to earn interest or to pay by credit card? Or do you find it easier if you can manage your coins with your own hardware?
Step 2: Estimate distribution
In particular, the autonomous management of assets (“be your own bank”) requires a certain amount of practice until their protection is routine.
For this reason, it can make sense for beginners to leave all or a large part of the coins on the exchange. A smaller proportion (approx. 5 – 10%) uses a browser wallet, mobile wallets, or credit cards. With this quota, crypto newbies can take their first steps and gain more security over time.
Advanced users are increasingly distributing their coins across various services and wallets. This is usually the stage when owners first test hardware wallets.
Experts know their own profile so well that they are strategic in distribution. For example, they determine which platform and coins give them the best benefit and act accordingly.
Step 3: Select wallets
Choosing the most suitable wallets is a top priority for every crypto owner. Because, as with fiat currencies, owners are better off not putting all their wealth in different wallets. This spreads the risk and protects against loss (theft, device broken, etc.).
The security of a wallet depends on several factors.
Wallets that you can store your Bitcoin safely in can be of the following categories:
- Cold Wallets
- Exchange Wallets
- Hot Wallets
- Custodial Wallets
Hardware Wallets are not always connected to the internet hence the chances of a hacker stealing your funds are minute. Also, Cold Wallets do not share your private key over the network which keeps your fund totally secured.
All wallets with cold storage are safe from hacks. These include hardware and paper wallets. The hardware wallet works similarly to a USB stick. Owners transfer access to their coins to the external device. The device only connects to the blockchain network during a transaction. But not every hardware wallet meets all security criteria and can automatically store any type of coins and tokens. This has an overview of the wallet.
As the name suggests, paper wallets are made of paper. They are a tried and tested means of removing access to the coins, ie the private key, from the network. But that also has disadvantages. If you lose the piece of paper containing the private key, then sadly you lose your coins.
For owners who buy cryptocurrencies solely for investment reasons and do not use them in everyday life, the combination of hardware and paper wallet plus the depot on exchanges is sufficient.
Next in the line are Exchange Wallets. As mentioned earlier, most exchanges these days store 90%-95% of the cryptocurrency assets in Cold Storage and hardly 5%-10% in wallets connected to the internet(hot wallets, we will come back to hot wallets in a while).
Exchange wallets give you the flexibility of quick transactions as you trade against the ledger of the exchange. Your ledger is settled with the Exchange at regular intervals and not the cryptocurrency itself.
Famous Exchange wallets include:
Hot storage means that the storage is connected to the Internet and obviously involves high risk. The latter stands for wallets that connect to the internet temporarily or not at all.
This type of wallet is dependent on the end device used, and the security mechanisms. Most exchanges rely on hot storage, at least for some of the assets. People use these types of wallets because of the ease of making transactions with them.
Online and mobile wallets are a little less secure but more convenient. Without them, neither the stock exchanges nor mobile payment transactions work. However, users can store a cushion of coins in these wallets for transactions or investments.
Many large investors prefer this kind of storage for their bitcoins. Custodial storage is storage wherein the investor stores his Bitcoins with a trusted & insured third party that provide Enterprise solutions.
Examples of Custodial Wallets are Staked Finance, MyContainer etc
Step 4: Secure wallets
It is a fallacy to rely on the fact that nothing can happen to the coins in the self-managed wallets. Any wallet is only as secure as the measures taken to secure it.
The first rule is to use complex passwords. Anyone who “locks” assets of a certain monetary value with 12345 or abcde open the door to the coins for hackers. Password management programs in encrypted cloud help in keeping the password safe. In addition, software and wallets need regular updating.
All wallets have a combination of private and public keys. The key pair contains the exclusive access option for each user to the coins (private) and the public “transfer address” (public). Precisely because the signature for transactions and the associated coins are also lost with the private key or seed, secure storage is the top priority.
Backup copies in various locations that are offline and/or encrypted help in recovery in case of loss. In the simplest form, this can even be the note in the closet.
If transactions require the consent of several users, it is best to set up a multi-signature variant. Similar to a joint marriage account, this permission request can only be granted if two or more parties approve the transfer. Many cryptocurrencies offer this option.
What if access to cryptocurrencies is lost?
Hard drives with the key to Bitcoin assets if not kept properly then wallets have to withstand hacks due to lax security precautions, or if we forget the password.
If the key gets misplaced, the possibility of accessing cryptocurrencies also becomes difficult. On the one hand, “Be your own bank” brings immense financial sovereignty. On the other hand, owners, unfortunately, expose themselves to increased risk.
In the future: Insurance?
Decentralization and independence from institutional bodies represent the original principles of cryptocurrencies. Besides, they are slowly and steadily finding their way into institutionalized and individualized finance via Bitcoin ETFs, futures, and DeFi. However, the real question is to what extent insurance coverage is safe.
With cryptocurrencies, there is no security fund or bailout fund like there is with money deposits such as call money. Even private household contents insurance would not cover the loss.
Where private investors get nothing, business people have better luck. The first suppliers from abroad now have products in their portfolio. Yet, they are still in their infancy and only cover the least serious cases, such as employee theft. Neither the personal loss due to negligence nor a hack is safe. The same applies to exchange rate fluctuations. All customers must make regular backups.
It will take a while before cryptocurrencies find their way into the private insurance sector. Here, too, it remains exciting to see whether the solutions will be unified or decentralized via blockchain applications.
With this, we hope you have a clear picture of how to store bitcoin safely. If there is anything else you want to know then don’t forget to comment below.