Best Practices To Follow In Securing Your Cryptocurrency Holdings
One of the most essential lessons recommended for a newbie in the cryptocurrency space is how to safely handle and store cryptocurrency assets. This is probably the most important lesson in crypto education especially when getting started. In this space, you are your own bank and as such you are solely responsible for any potential losses incurred.
From buying cryptocurrency using a crypto exchange to finding a secure wallet for storage & safe transaction of cryptocurrencies on a daily basis, a lot could go wrong simply due to ignorance or for not possessing enough knowledge on cryptocurrencies. So let’s talk a little about blockchain technology and how cryptocurrencies tie into it.
Cryptocurrency and Blockchain: Let’s get to know the basics!
Bitcoin was the first cryptocurrency founded by an anonymous person or group of persons under the pseudonym Satoshi Nakamoto in the wake of the 2008 financial crisis. Since their inception, Bitcoin and other cryptocurrencies have continued to march towards mainstream adoption.
A cryptocurrency is basically a virtual or digital currency secured by a cryptographic ledger which renders it almost impossible to produce counterfeits and make it immune to double-spend. Most cryptocurrencies are decentralized and built on top of blockchain technology.
A common feature among most cryptocurrencies is that they are neither issued nor controlled by any central party. As such, they are resistant to censorship and government interference or manipulation. By design, they are decentralized.
Cryptocurrencies can be transacted directly between parties seamlessly without the need for a third party; no banks, no escrow system. Usually, a mining fee is charged for sending cryptocurrencies, which is paid by the sender. Most blockchains support lower fees of less than a cent or few cents which competes favorably with the exorbitant fees charged by banks.
Bitcoin runs on a trustless and transparent ledger technology (blockchain) which broadcasts a copy of all its transactions to all parties involved. Every transaction is therefore visible and verifiable by everyone in the network.
In verifying transactions blockchain technology assumes a consensus algorithm. For any changes to be made on the network, a consensus must be reached by all the peers of the network (for. Eg all miners in the case of Bitcoin). Should a proposed change fail to gain the needed consensus, such a change will be dropped by the network automatically.
1. Choosing a Bitcoin Wallet
Buying cryptocurrency for the first time would also imply finding a trusted cryptocurrency wallet to safely store your assets. Knowing the right features to look out for when choosing your crypto wallet is of utmost importance for a crypto enthusiast. Many have experienced tragedies and at times lost faith in cryptocurrencies altogether as a result of ignorantly choosing less safe options for crypto wallets.
Cryptocurrency users have the option of choosing between online, offline or hardware wallets. Depending on the choice you make settling for a wallet with the most secure features is optimal. Although offline and online wallets have proven to be secure, however, hardware wallets are known to provide the highest security for your digital assets.
Online wallets are generally free, user-friendly and readily available and as such, they are the most commonly used wallets in the crypto industry. At the same time, they’re the most vulnerable among the different types of crypto wallets. Next to a hardware wallet, an offline wallet offers relatively better security for your crypto assets. With the offline wallet, you stand the risk of losing your funds only if you lose the paper slip.
2. Crypto Wallet Security
When considering a web wallet, make sure to choose from a list of wallets that are HTTP secured (HTTPS). You can narrow down your choices based on whether the wallet is 2FA/MFA enabled and has support for a stronger password. A web wallet that does not support these features could pose some dangers to users’ funds. Blockchain.com is a good example of such an online wallet, easy to use and suitable for secure storage. Online wallets are often referred to as cloud wallets.
If security has the highest consideration above user friendliness, cost of service etc, a hardware wallet is always recommended. Ledger Nano X is widely recognized among hardware wallets out there and to its credit has historically recorded almost zero attacks in the past.
Most Bitcoin wallets are Multisig; meaning they require more than one key to authorize a transaction (it takes multiple parties to sign a transaction before being executed). This is another great way to secure Bitcoin from potential theft. Some popular multi-currency wallets are Trust Wallets, Coinomi, Blockchain.com mobile wallet, etc.
If you are using a cryptocurrency wallet for the very first time, sticking to a secure yet user-friendly wallet should be your goal. Most times, losses occur due to inadequate knowledge on how to transact cryptocurrency assets. These kinds of losses are amplified if the wallet is complex; making it hard to navigate through.
Of course, there are cases where crypto assets are lost having sent them to the wrong recipient. For example, Bitcoin is sent to an ETH address; especially when you are using multi-currency wallets. Cases like these are quite common but are also categorized as a rookie’s mistake. Therefore, wallets that do not flag an invalid address should be completely avoided.
3. Securely Backing Up Your Wallet
You will have little or no control over your wallet if it is not properly backed up. A typical wallet consists of a private and public key. As the name implies, public keys are not secret; they can be seen by anyone without any potential consequences. Public keys carry information about all your transaction history. Anyone who gets hold of your public keys can view all your transactions history but cannot make changes to your fund balance.
Private keys on the other hand are secret keys and are very important; they should be kept as a secret from any third party. Private keys are the master keys to your funds, anyone with your private keys can spend your funds without authorization. That string of characters is all that you need to recover your funds in the event of losing access to your mobile device or PC which stored your wallet.
Therefore, it must be correctly copied and kept somewhere private for maximum protection. It is a good practice to save these keys in multiple offline locations. Never store your private keys online especially in an email or a central database that can be exploited.
When choosing a cryptocurrency wallet, make sure the wallet gives you an option to export your private keys in an encrypted file. Avoid taking screenshots of your private keys or passphrase, as some apps could have access to your screen and files.
It is also considered best practice to try restoring your funds using those private keys or passphrases to ensure that your backup works. Although, they work without failure if copied correctly.
4. Not Your Keys, Not Your Coins!
Chances are that you probably have heard about this statement a few times! The statement became a crypto-household amidst the rising popularity among centralized exchanges which store your keys but never give you access to them.
If you don’t own your keys, you have limited control over your funds – it’s as simple as that! Although centralized exchanges are easy to use and best for trading, they are always the prime targets for crypto hacks, as such users can easily lose their funds in the case of a large-scale attack.
A centralized cryptocurrency exchange can deny you access to your funds at any time, act on government directives to seize your assets or simply turn out to be a fraudulent business and steal your funds.
Keeping this in mind, cryptocurrency exchanges aren’t a good place to store your crypto assets except temporarily for trading. If it becomes paramount to move your crypto funds to an exchange, then it’s best to stick to the reputable ones.
A decentralized wallet which gives you access to your private keys should be the preferred choice for storing cryptocurrency assets. Crypto security is one of the most discussed topics in the industry, yet many people aren’t paying enough attention to it.
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