How Do You Protect Your Bitcoins Against Theft and Hacks?
The best way to protect your bitcoins and other digital assets from being stolen is to keep your private keys stored in a cold wallet. Cold wallets are not connected to the internet or even another device.
No storage device is 100% secure or safe, but there are several methods you can take to secure your cryptocurrency keys.
Key Takeaways
- Cold wallets, also called cold storage, are the best way to secure your Bitcoin private keys.
- Some exchanges provide institutional-level secure cold data storage for users' keys, but some critics advise against this method.
- A few exchanges have insurance against cryptocurrency theft in certain circ*mstances, but the incidents covered are very limited.
- The best way to secure your keys is to combine cold and hot wallet uses so that only the cryptocurrency you need at the moment is in the connected wallet.
Protect Your Bitcoins With a Cold Wallet
There are several good wallets to choose from to protect your cryptocurrency investments. Many of these wallets look like USB drives—some newer versions resemble smartphones—and act as physical storage for your private keys. Bitcoin and other cryptocurrencies are not actually stored anywhere because they are virtual. They are ones and zeros on a database that represent ownership, each a portion of a cryptocurrency associated with a public key (the wallet address) and a private key (like a password to access the cryptocurrency). The private keys are what need to be stored in a cold wallet.
Cold wallets cannot be hacked because they are not connected to the Internet. Hardware wallets are very effective against digital thieves, but if you lose yours after transferring your private key(s) to it, you'll never recover the cryptocurrency.
Using multiple accounts and wallets can reduce your chance of becoming a target, but it increases the chances you might forget a password or lose your keys unless you are very thorough.
Store Your Bitcoin on an Exchange
Most transactions involving cryptocurrencies are done via a cryptocurrency exchange. These platforms are typically accessible via a web browser or a mobile application and allow users to acquire tokens and digital coins using either a fiat currency or a different cryptocurrency. The issue with this approach is that you are effectually relinquishing control of your private keys and trusting another entity to store them for you. There are advantages and disadvantages to this.
Advantages
Storing your cryptocurrency private keys on a reputable and regulated exchange might be as secure as the cold wallet you choose—it might even be a better choice because of the insurance some provide against stolen or lost cryptocurrency. For instance, Coinbase and Gemini both offer custodial storage for their customers. Each offers enterprise-level, offline storage used by businesses and governments to securely store data.
These two exchanges even offer insurance for your holdings through commercial crime insurance policies. An exchange with institution-level security measures and insurance is a secure choice, but it still comes with some risk.
Exchanges that are hacked generally have not had their security procedures audited or are sloppy in their security. If you choose this route, it's imperative to research the exchange to make sure they will secure your holdings properly and offer some type of protection.
Some cryptocurrency exchanges partner with institutions that hold U.S. dollar cash balances in custodial accounts, insuring deposits under the FDIC. However, that protection doesn't extend to client crypto balances.
Disadvantages
Some cryptocurrency security experts recommend against keeping any digital currency holdings on an exchange for two primary reasons. First, if the exchange is hacked, you may lose your holdings. Second, if the exchange were to fold for any reason, you may be unable to recover your holdings.
There is no cryptocurrency equivalent of the Securities Investor Protection Corporation (SIPC), which protects clients of failed brokerages against losses of up to $500,000 per account, including up to $250,000 for cash balances. Cryptocurrency wallets are also not insured by the Federal Deposit Insurance Corp. (FDIC), which provides up to $250,000 protection for deposits at qualifying banks and credit unions.
Regarding an exchange's asset insurance, these policies are beneficial but very limited. For example, Gemini's insurance only covers theft from the hot wallet it provides that results from a hack, a fraudulent transfer, or an employee that steals it. If your account's username and password are compromised and stolen, you're not covered. The insurance also doesn't cover any assets used on other wallets—so if you use a hot wallet not provided by Gemini to make transactions on the exchange and have funds stolen, you're not covered.
Combine Your Bitcoin Storage Methods
To secure your bitcoin and other digital assets, it's best to use a combination of methods. For example, you could keep your private keys on a cold storage device when you don't need to access them immediately. Once you decide to use them, you only transfer what you need to your hot wallet or the exchange.
Once you conduct your transactions, you would move all of the keys back to your cold storage device.
Allocate a Trading Balance
Another option is only to store what you want to use in a trade on an exchange using its custodial cold storage. You could keep the majority of your holdings in cold storage and use the amount you allocate to yourself for trading. This way, if there is a hack or system failure, you only lose what was on the exchange.
Investments Should Be Kept in Cold Storage
If you're buying cryptocurrency as a long-term investment, hoping for price appreciation, there is no reason to hold your private keys anywhere but in a cold storage device. Make sure you check on it every once in a while and make backups if possible. Protect it in a fire-proof safe or deposit box for additional security.
The storage system you devise is up to you, but remember that it's always best to control your keys yourself. Lastly, it's important to understand that the more convenient a storage method is, the less secure it is.
How to Secure Bitcoins?
Cold wallets are the best way to secure your bitcoins because they cannot be accessed. Once you transfer your keys to cold storage, only transfer what you need to your hot wallet. Also, avoid custodial storage arrangements unless you need to use it for trading purposes or want limited insurance coverage.
What Is the Safest Place to Keep Your Bitcoin?
Cold wallet hardware devices are the safest places for your private keys if they are stored in a secure environment, such as a safe. Make sure you back them up and check on them regularly.
What Is the Best Security for Bitcoin?
Preferences may vary, and there are many storage solutions. Regardless of what you choose, the best practice is to use a combination of methods, only transferring what you need to use immediately to a hot wallet or exchange.
The Bottom Line
Securing your bitcoin and other digital assets isn't as complicated as it might seem, and many options are available. The best practice is to use a combination of methods and only put the cryptocurrency you intend to use immediately in a hot wallet.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimerfor more info. As of the date this article was written, the author owns BTC, ETH, ADA, and XRP.
