Hacks on Hacks on Hacks!
Although the technology of Cryptocurrency itself is very secure, the infrastructure of where it is stored is a different matter, as of December 2018, $1.5B (that’s right, $1,500,000,000!!) has been stolen from different Crypto exchanges, the largest ever SINGLE hack being $534,000,000.
It is painfully clear, your choice of storage is quite important, if you don’t want to join that party.
The fail safe that is becoming more common as exchanges grow in size is that they are able to reimburse funds that have been stolen, notably the recent hack that occurred with Binance of around $40,000,000 (in bitcoin), Binance confirmed that they will be refunding all funds to the user’s that lost them, essentially an insurance policy. Signifying the industry is legitimizing and moving away from its old description of the ‘Wild west’.
Due to the above incidents, it is imperative everyone’s Crypto assets are stored correctly, or at least all the risks are known so that one can create a plan mitigating risk by storing most valuable crypto assets in the most secure method and less valuable crypto assets in a less secure but more convenient method, all will be explained below.
There are fundamentally 2 methods to store one’s crypto’s, online and offline, respectively called a Hot Wallet and Cold Wallet, below we will describe what they are and also the various advantages and disadvantages of each. To conclude we will outline a plan as to how you can effectively utilise a mix of both and why that can be an effective strategy.
This is where your Crypto’s are stored online, usually with an exchange, like; Coinbase, Binance and Gemini. Usually the exchange stores all their users private keys in their own ‘secure’ online facility. It is these facilities that are prone to hacks as it’s like having all the gold stored (Gold being Cryptocurrencies in this example) in one vault with a massive heavy iron door, like the old days. So hackers have been able to get past their ‘secure facilities’, open the vault and loot the exchange.
- Less hassle to convert Crypto’s from one to another as exchanges normally have several different Crypto currencys available
- Depending on exchange, you will be able to convert crypto into fiat (£$) and transfer to a bank account
- Relatively easy to set up and create an account (wallet)
- Overall, less hassle to log in and check your account, as all you require is username and password (2FA is highly recommended for increased security)
- Potential for loss of funds
- Single point of failure i.e if hackers get in, everyone’s at risk of losing their funds as everything is held in ONE place.
This is where your Crypto’s are stored completely offline, meaning your private key is offline and does not connect to the internet, usually stored on a device such as a Ledger Nano or Trezor. Unlike hot wallets where your private keys (definition below) are held with an exchange on their online facilities together, cold wallets, the private keys do not enter the highway of the internet therefore protecting it from theft. Continuing with our Bank vault analogy when describing Hot wallets, essentially it is like having your own safety deposit box that one keeps in their own house and no one knows the address of that house.
Ledger nano/Trezor – USB like device which stores your private key, contains technology which prevents access to the private key without a secure PIN.
Private key – I was going to give a detailed jargon filled explanation however this will do more to confuse rather than provide understanding. In practical terms, it’s a long string of characters which is used as an address to send your Crypto’s to. This string of characters is what needs to be kept super secure as if obtained by wrongdoers, it allows access to your Crypto’s.
- Most secure form of storage, can only be hacked if physical device is stolen with PIN and random 24 words which is very difficult
- Peace of mind if one has a large amount of cryptocurrency with a high price tag
- They have a cost unlike hot wallets (free), Ledger Nano S starting from around $70
- Usually doesn’t support all Crypto’s, rule of thumb is less popular Crypto’s aren’t supported
What’s the plan?
If you are just starting off with your investment journey, and you have invested what is a small amount to you (have a look at our previous article on how much to invest), an amount which if lost, would not cause you to drown your sorrows in a pub, then simply keeping your investment on an exchange would make the most sense, as it requires the least hassle and is very accessible.
If you have progressed in your investment journey, or simply, you have decided to invest a considerable amount from the get go, and if this investment got looted WOULD cause you to cry your eyes out, then investing in a cold storage method like a Ledger Nano S would be the more suitable option for you, due to it being completely offline, it is the most secure form of storage and would allow you to sleep easy at night knowing your investments are safe.
If you have a considerable amount invested and you are more active in the market, potentially taking small profits occasionally, or even converting Cryptos from one to the other, then a mixture of both hot and cold storage could be used to great affect. The majority of one’s portfolio could be stored cold whilst a small percentage could be stored hot and used to transact with.
To conclude, with the above information, if followed will provide you with the knowledge to mitigate the risks involved in storing your Cryptocurrencies, we have every belief that they will be worth a great amount in the future therefore they need to be treated as such. Invest safe and responsibly!
If you have any comments or questions, do let us know below