An Introduction to Cryptocurrency Security
All cryptocurrencies are stored in a personal wallet, which is much like a bank account for cryptocurrencies without any bank. Each cryptocurrency has a receive address which changes when currency is received into the wallet. This address is the unique identifier of the wallet itself.
When it comes to cryptocurrency, security is of paramount importance. And the responsibility lies 100% with the consumer. If you make a mistake there is no recourse, and your funds are gone.
Coinbase, one of the world’s largest Bitcoin exchanges, is an exception to this rule and it does offer third party insurance on cryptocurrency. But Coinbase essentially acts like a bank given its regulation and to a large extent defeats the purpose of Bitcoin, which is to ensure a free, decentralized and unregulated market.
Poorly secured cryptocurrency has been the cause of billions of dollars of lost funds. Given the lack of regulation the onus is on consumers to educate themselves and take the proper action.
This action mainly involves having two copies of the unique recovery passcode associated with a cryptocurrency wallet, and storing each in a safe location. If you lose this passcode then you will lose your funds if the wallet gets compromised or you forget your wallet password.
So essentially you are given a recovery password in case something happens to the wallet itself, such as it no longer being supported. And you will also have a wallet name and password to login to your wallet.
Your recovery password is not stored anywhere else and it is generated when you create a new wallet. So if you lose it, there is no way of recovering it as it is not saved anywhere.
The following are the three most common ways in which cryptocurrency is lost or stolen. The first is through phishing scams.
A website is set up which looks very much like the official site to download a wallet for a particular cryptocurrency. Users then click on links to this “official” wallet which has malicious code inserted into the software.
Users deposit funds into this fake wallet and the funds are stolen. This happens over, and over, and over, and over, with multiple types of cryptocurrency.
It is far easier for hackers to engage in such scams which target new users than to try to hack secure online platforms with teams of cyber security specialists. And they will always take the easiest route as opposed to the more elaborate schemes.
The second most common way that cryptocurrency funds are lost is through online exchanges. It is not that the exchanges are hacked per se. It is that the operators of the exchange set it up and simply take off with user funds. It is untraceable and unaccountable.
This happens all the time on black market places such as Alpha Bay and Silk Road. Not to mention exchanges such as Mount Gox where 850 thousand Bitcoins were stolen.
Do not keep funds in an exchange, with the possible exception of Coinbase. There is debate about whether Mount Gox was hacked or whether it was an inside job. But either way at the time it was held to be completely safe, until it wasn’t.
And the third most common way to lose funds is by a simple misplacement of the recovery passcode, which is not recoverable. In other words, if you use an official wallet for a desktop/hardware wallet, and keep two secure copies of your recovery code, you are extremely unlikely to lose your funds. Cryptocurrency storage does not have to be more complicated than this. Take a look at our list of the best Bitcoin wallets of 2018.
What is a Bitcoin Hardware Wallet?
A Hardware wallet is essentially a piece of hardware that you carry with you. The hardware will store your recovery passcode and your wallet private address.
So it is still very important that you have a paper backup in case you lose your hardware. You will still have a wallet on your computer, but funds cannot be sent from this wallet without being verified from your hardware wallet.
The hardware wallet will have a pin to activate. If you lose your pin you can reset it with your recovery passcode, so even if thieves steal your hardware device there is nothing they can do, unless they have your pin.
If this happens you need to recover your wallet using your code before they do and transfer the funds, as presumably you will both have the recovery code.
Hardware devices are also resistant to brute force attacks. Each time a wrong pin is entered, the wait time doubles. So it would take 18 hours to enter the top 15 pins.
If your computer gets stolen, you can just plug your hardware device into another computer. If your hardware device gets stolen, you can simply buy another hardware device. It is foolproof in so many ways.
Much like the top hacker scam outlined above, the most common way to lose funds with hardware is to purchase hardware that is not official. If you buy a hardware device from eBay or any site aside from Amazon or the official site, you are buying a device that has been tampered with so hackers will take your funds. It is the hardware equivalent of going to a fake site, as you are buying fake hardware that is not the real thing.
For all intents and purposes, hardware devices are practically unbreakable and are by far the best way to go. The only point of failure is to buy a fake hardware device or to fail to store a paper recovery passcode and also lose your pin or hardware device.
The most popular hardware devices are multi-coin as opposed to being designed specifically for Bitcoin. There is no real reason to limit hardware wallets to one coin.
Bitcoin Hardware Wallets 2018
Ledger HW 1
This is a new wallet on the scene with mixed reviews. This is basically a tradeoff between usability and price. It is much cheaper than the Ledger Nano or the Trezor which retail at $99 but is less user friendly and intuitive than the other two.
It is a secure and cost effective wallet but so far people are not smitten with the user interface. In terms of security it does as good a job as any other hardware wallet.
Another wallet to look out for in 2018 is the Ledger Blue. This is touted as the next step in terms of cryptocurrency storage.
It is in many ways the opposite of the Ledger HW 1. It is far more expensive, retailing at nearly $300, but has an ultra-slick interface. It was launched in December 2016. Aside from being the coolest and most user-friendly hardware on the market, it also boasts a number of extra features.
However, it is questionable whether it is worth the extra price. All hardware wallets are incredibly secure so from a security standpoint they are almost the same thing. It is a lot of extra cash to pay for a pretty face, nice as it is.
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As the names suggests, this is indeed a cool and innovative wallet. It looks like a credit card and can thus fit into your wallet, which is quite a neat feature. It is a slim electronic device that stores your private keys and can connect via Bluetooth to any device.
Unlike other mainstream wallets such as the Trezor or Ledger Nano it can connect to your mobile phone or other devices without a USB. This is a cool, elegant and futuristic solution that is waterproof and feels like a credit card.
Bitcoin Software Wallets
Software wallets are not as secure as hardware wallets but can still be very robust. A good software wallet is still extremely safe, if not as safe as a secure hardware wallet. Software wallets can be subdivided into online wallets and desktop/local wallets.
Online wallets are stored online where they are on a network. Desktop wallets are stored locally on your computer where they are less vulnerable to hacking attacks.
Copay is an open source and free software wallet which is well established. As it is not bound to individuals or corporations there is less chance of corruption.
Unfortunately, at the time of this writing there is an issue with missing user funds and this wallet should be avoided until this issue is resolved. This does not always indicate corruption and theft and is more common than one would think, but it still does not bode well.
Copay has the added advantage that it can store multiple accounts and it is available on Mac, Linux, Windows, Android and IOS. It also has a clean user interface, with support for multiple languages and it shows cryptocurrency prices in 150 different currencies.
Electrum is possibly one of the most secure and well-known wallets for Bitcoin storage. It is designed specifically for Bitcoin storage and though its interface is not the coolest, it is definitely one of the most secure wallets there is.
You can rest easy knowing your coins are safe in Electrum. It is one of the most commonly recommended Bitcoin wallets and stores Bitcoin exclusively, which might be a disadvantage for those looking to expand into more cryptocurrencies.
Just remember to download the official Electrum wallet from the official site. Electrum is a desktop client so your Bitcoins are not stored online.
Jaxx is a relatively new wallet that supports a number of different cryptocurrencies. The design of this platform is wonderful and the user experience is second to none.
ShapeShift is integrated into the platform which means your assets are easy to move and in high demand. It is a smooth platform that is very beginner friendly.
It currently supports seven cryptocurrencies and it is a local device, meaning you have full control of your wallet. Jaxx has been the subject of some bad press as of late, though there have been no known leaks or breakages. Just remember to download from the official site and you will be fine.
Other Bitcoin Wallets
There are a wide variety of high quality Bitcoin wallets, which makes sense given that Bitcoin has been around for nearly 10 years. The best of these is possibly Exodus, a multi coin desktop client much like Jaxx, except better in a number of ways.
It currently hosts over 29 cryptocurrencies and ShapeShift is likewise integrated into the platform. Blockchain Info is an online site which does not keep private keys to your wallet so there is nothing for hackers to steal. It is well established and highly regarded.
Coinbase, an online exchange, has a team of cryptocurrency specialists securing the network and they have no incentive to steal user funds. It operates much like a bank and it is highly regulated by multiple US regulatory authorities. If they steal user funds, they will go to jail.
The Ledger Nano, the Trezor and the KeepKey are the three top hardware wallets and all retail at around $99. They do a foolproof job of keeping your recovery phrase safe, which is the main component to safe cryptocurrency funds.
Alternatively you can generate a paper wallet, which is a combination of a public and a private key. You send your Bitcoin to this address and only you have this address. This process is free but does not come with the ease of use or features of a hardware device, although it is theoretically just as safe.
Bitcoin Wallet Summary
There is no shortage of Bitcoin storage options and there are a wide variety of options. Hardware wallets are by far the best choice and cold storage is always best, where you keep your cryptocurrency offline.
For people short of funds a paper wallet is just as secure as a hardware wallet. However, keeping your Bitcoins online is also safe as long as you remember your recovery phrase.
There is little chance of a site such as Blockchain Info being hacked and the real threat still lies in downloading the wrong wallet client or simply forgetting your recovery phrase. The only reason to get a hardware wallet is if you are keeping funds for other people or if you have a large portfolio.
Generally speaking, hackers will focus on easy wins using everyday phishing scams, which are still amazingly effective despite repeated warnings from security specialists.
Last update on 2019-10-31 / Affiliate links / Images from Amazon Product Advertising API