Managing the Safety of Your Cryptocurrency
The fact that Coinbase and other companies have made it possible for nearly anyone to invest in cryptocurrencies is almost unilaterally a good thing, but it has led to many people buying cryptocurrencies without understanding the ecosystem. Bitcoin and other cryptocurrencies are only seen as risky investments because of their future worth, when there is also the risk of theft in the present.
Many investors focus their time on the idea of maximizing the returns on their investments, but protection against downside is equally important. We’ve all heard the oft-cited thought experiment where when you lose 50% of your investment, you now need 100% returns to get back to even. Avoiding negative returns is an equal priority to achieving high ones.
There are some steps a newbie cryptocurrency investor can take to make sure they are as protected as they can be. From wallets to basic security and diversification, the points below are a few quick changes you can make that will maximize your security.
The two most basic steps are not keeping your money in an exchange wallet, and using a 2-factor authentication application. Many people new to the ecosystem will go with the path of least resistance, and that results in only having a password protecting their assets.
Exchanges are considered to be secure, but there have been many breaches in the past, so it is not impossible your funds could be compromised in the future. In the case of a hack, hopefully your exchange would cover you, but the best thing you can do is move your funds into an offline wallet (e.g. desktop, mobile, or hardware). By splitting your money off from the giant “honeypot” that exchanges serve as, the incentive for hackers is greatly reduced.
Additionally, by enabling 2-factor authentication and using an application, you mitigate for the risk that your password or phone number are compromised. This may sound crazy, but it is possible for a SIM card to get hijacked and a hacker to use your phone number to gain access to your funds. Authly and Google Authenticator make it possible to prevent that from happening.
Once you have made sure your money is on a wallet, there are still risks you need to understand. At this point, the biggest risk is that you might forget the passcode or PIN to your wallet. Or you could lose the device with the private keys on it. Both of these situations can be handled easily by taking careful note of your memetic passcode and backing up your wallets onto a second device.
It might help to back up a bit for a second. Your private key is what verifies your ownership of a public key, which can be thought of as being similar to a bank account. When you moved your coins into an offline wallet, you “took ownership” of your private keys. This is an essential part of forming a decentralized network, because if you hadn’t done that, all the keys would still be managed by a centralized source. Another way to look at it as if you are making sure no one else knows your ATM code.
Something fewer people in the ecosystem realize is they are not assigned a single set of keys, but actually many pairs. These pairs of keys are generated from a “seed root”, which is a 16 word sequence of seemingly random words (see this list for more about this). By having this seed root, you are can prove you are the rightful owner of the cryptocurrency in question. It is considered to be the password of passwords, and should be guarded as such.
Knowing all of this, the best way for you to carry on with your security is to write down your 16-word seed root, file it away in a separate area from your wallet, and then back up the data onto an offline hard drive that can be recovered in the case of emergency. All of this may sound like a paranoid hassle now, but the small time investment will make the difference.
Protect Your Crypto
By learning to manage your money well, you will be able to increase the protection of your cryptocurrency. The final thing you should consider is spreading out your funds between several different wallets. There is always the risk that a company gets compromised, and by diversifying where you hold your securities, you can reduce the effect this may have.
Featured image courtesy of Shutterstock.