There are many ongoing discussions about the use of blockchain across various industries and markets.
In short, it is the distributed ledger technology or underlying foundation of Bitcoin, one of the most high-profile cryptocurrencies.
There are both public and private blockchains, and each has its own set of strengths and weaknesses regarding security. But the system itself, which records transactions, is reasonably secure, which strengthens the belief that cryptocurrencies are secure. Sadly, that couldn’t be any farther from the truth.
Blockchains aren’t entirely safe for a number of reasons. The most important thing you need to understand is that the network used to facilitate the blockchain and transactions is vulnerable in many forms – thanks to decentralization.
But Bitcoin and related cryptocurrencies aren’t completely secure either. In 2016, hackers were able to steal nearly $70 million worth of the virtual currency, by tapping into a Bitcoin exchange. In early 2014, a similar attack resulted in the loss of an estimated $350 million in Bitcoins. Cyberattacks and thefts are not unheard of, even for a virtual currency such as Bitcoin.
This brings to light several security concerns regarding the ownership and transfer of modern cryptocurrencies. If you’re going to dabble in things like Bitcoin, what are the security risks you should remain aware of?
- Cryptocurrency Is Not Backed By Anything
In the real world, you have insurance to protect your belongings and yourself. If something unfortunate happens, the insurance policy will hopefully help you bounce back. If a hacker breaks into a bank system and steals virtual money, you don’t actually lose your money. There are ways to get it back, and plenty of ways to file grievances. There are various ways to fix the situation.
With cryptocurrency such as Bitcoin, that’s not the case.
You might as well be holding cash in your hand. If someone runs by, snatches that money and disappears into the crowd, it’s gone, for good. The same is true of cryptocurrencies, with few exceptions. In fact, a cryptocurrency called Aureus is the only cryptocurrency available that’s based on the real-world economy.
So, unless you use Aureus, your digital wallet could be as much of a liability as it is an opportunity.
If you lose the encryption access to your wallet, you lose everything contained within. If someone hacks your computer or system and gains access to it, they can transfer everything to a source of their choosing, and it’s gone.
If you invest everything in Bitcoin, and then you lose that money, it’s gone for good. Be smart about it. Manage the amount of Bitcoin you handle or invest in different kinds of cryptocurrencies. Keep multiple wallets and don’t store everything in one place. Furthermore, always back up your wallet encryption keys and data.
- You Need a Core Wallet
There are many types of wallets or “digital banks” where you can keep your cryptocurrencies. But if you’re going to store your money offline, often referred to as cold storage, it’s critical that you use a core wallet.
Wallets are constantly changing and receiving development and update solutions. Core wallets, however, are guaranteed to have keys and file formats that are compatible across all versions, old and new. You won’t ever lose access to your currency because the wallet or software was updated and can no longer interface with older versions.
Furthermore, these tools are not infallible. It’s entirely possible to lose your money or see it drop into limbo because of a coding mistake or an issue in the code. Bitcoin can also get stuck during exchanges. If you can fix the problem, great! It may take you a while, but at least you get your currency back. If you can’t, well, then you lose everything.
- It’s Inherently Data
Virtual, digital, invisible, whatever. Describe it how you want. Just know that cryptocurrencies are nothing more than sets of data. They are no different than a bank statement stored in your computer documents, a photo or image of your family or a risque video file tucked away in a hidden sub-folder. It’s data, plain and simple. That means, people can manipulate it, copy it and delete it, and it can even be corrupted.
Treat your cryptocurrency like sensitive data it is. Ensure that you encrypt your content, and then encrypt it again before dropping it into cold storage. Move it around between systems or portable drives, and then password protect the content. Keep backups, and keep those backups secure.
If and when a hard drive fails, you lose all data, media and content stored on the drive. In the back of our minds, we’re always worried about this happening. It’s why we back up our data. It’s why we keep multiple versions of important files. Do the same for your cryptocurrencies and wallet. Because once you lose access to them – whether you just forgot a password or someone accidentally deleted a file – they’re gone for good.
- Protect Your System
As Andreas Antonopoulos said, “nothing teaches [you] about [cyber]security faster than having Bitcoin on a Windows machine.”
The data you have is only as secure as the system or source where you have it stored. If you make a habit of opening questionable documents or attachments, you’re opening yourself up to a world of hurt. If the system where you have your wallet stored gets a virus, malware, spyware or ransomware, it may affect your access to your money. Lose control of your system, and you lose control of your money.
Security begins and ends with your computer. Keep your virus and malware software up-to-date. Install all necessary OS updates and security fixes. Don’t install questionable apps or download unknown media and files. Don’t ever trust strangers or unknown contacts and screen everything you’re not sure of. A file attachment from someone unfamiliar, for example, should be scanned by a virus or malware tool before you open it.
- Just Say No to Mobile Wallets
Mobile wallets have cropped up as a useful way to carry cryptocurrencies with you and even pay for goods and services in the real world. Best practice is not to use them at all unless you absolutely need to. Even then, don’t store a lot of cash in your mobile wallet.
Think about it. You would never put thousands of dollars in your real wallet or purse.
In the rare cases where you might have a lot of cash, you get nervous, real quick, for obvious reasons. It’s just not a smart thing to do, and it’s incredibly risky.
The same is true of mobile cryptocurrency wallets. If you’re going to use them, don’t carry more than you need.