A Beginner’s Guide to Cryptocurrency Security

September 16th, 2020

Cryptocurrency is becoming a popular option for people looking to invest. Compared to traditional money, you can’t carry cryptocurrencies, such as Bitcoin on your person so you need to know how to secure your digital money.

Investors that are new to cryptocurrency may want to understand more about security. In this guide we’ll explain the issues behind cryptosecurity and what you can do to keep your cryptocurrency safe.

This guide will answer the following questions:

  • What is cryptocurrency?
  • How secure are cryptocurrencies?
  • What are the security risks and issues that can arise with cryptocurrencies?
  • What are some common cryptocurrency scams?
  • How can I invest in cryptocurrency safely?

What is cryptocurrency?

Cryptocurrency can be used to purchase goods and services in the form of coins or tokens. There are many types of cryptocurrencies, the most well-known being Bitcoin. In 2009, Bitcoin was introduced and was created under the pseudonym Satoshi Nakamoto. No one knows if Nakamoto is a single person or a group of people who created it, but Bitcoin became successful because it’s a quick and easy way to transfer money.

After the banking crisis of 2008, a decentralised banking system was welcomed as the transfer of money was cheaper and faster. Bitcoin is still the most popular cryptocurrency, but since then there have been thousands of other cryptocurrencies that have been released.

How secure are cryptocurrencies?

Security is a major concern when it comes to money. Cryptocurrencies are reliable and secure because of one main reason – they are encrypted. Encryption is when data is converted into a code which cannot be accessed by anyone who doesn’t have the key to decrypt it.

Cryptocurrencies such as Bitcoin are stored in blocks of encrypted data known as blockchains. It’s almost impossible for a cybercriminal to change or overwrite blockchain data because all the information stored on these blocks has a timestamp which is recorded in hash functions. The lack of a central server where the data is stored means there’s no clear site for the hacker to target.

In cryptocurrency, a single key is created called a private key and this gives the owner of the key full control of a crypto wallet and address. Maths is applied to the private key to derive an address. This address is what can be shared with others in order to send and receive coins. A private key can generate many addresses, but it isn’t possible to figure out a private key from an address. Only a private key can send coins from an address.

Another great thing about crypto is that it uses the same encryption as other systems, such as the military, NASA and banks. So if crypto is ever broken, so is all the other infrastructure. The most important thing when investing in anything, is to keep your assets safe and keep up to date with the latest cryptocurrency news.

What are the security risks and issues that can arise with cryptocurrencies?

Before you start buying cryptocurrency, you need a secure wallet to store it. This isn’t a regular wallet though – it’s a cryptocurrency wallet. Think of it like your personal crypto bank account.

Every cryptocurrency wallet will create a private key between 12-24 words in length. It’s very important that you store this passcode in a secure place. Once you lose that passcode, you won’t be able to access your cryptocurrency in the wallet.

What are the types of cryptocurrency wallets?

Cryptocurrency wallets come in many different forms, including software, hardware and online. Wallets are often placed into one of two categories: “hot” or “cold”. “Hot” wallets are connected to the Internet, while “cold” wallets are offline. Below we’ll discuss the different types of hot and cold wallets and how they work.

Hot wallets

Experienced cryptocurrency investors will have both hot and cold wallets because they serve different purposes. For example, when you go to an ATM, you take out the money that you require and keep the rest in your bank account. The same goes for cryptocurrency. It’s safer to keep the majority of your money in a cold wallet, and use a hot wallet for everyday transactions.

Cyberattacks may target hot wallets when there are large amounts of crypto stored in them. Only keep what you need in a hot wallet.

Types of hot wallets

If you’re trading on a cryptocurrency exchange platform like Cointree, you can choose to hold your crypto assets in an online wallet with them. An exchange manages your wallet securely on their server. If you’re concerned about storing your cryptocurrency with an exchange, check to see if they are registered with AUSTRAC which is required by law in Australia. Many Australian exchanges are also members of Blockchain Australia, who is the industry body that represents Australian companies who participate in the digital economy.

Alternatively, there are software wallets which aren’t connected to an exchange so you remain in control of your private keys. A software hot wallet is a downloadable app that you can access on your computer or smartphone. It’s still vulnerable to being hacked so you shouldn’t keep all of your crypto assets in it.

Cold wallets

These are more secure because your cryptocurrency isn’t stored online, which makes it extremely difficult to hack. They are called cold wallets because they aren’t connected to the internet and are kept in cold storage. You will need to connect to the internet to make transactions, but these wallets store your cryptocurrencies and private keys offline.

Due to the added security, transferring crypto to and from a cold storage device is somewhat more time consuming and burdensome than for a hot wallet. A cold wallet should be stored in a secure place, but somewhere that you won’t forget where it is, as lost or damaged hardware means you won’t be able to retrieve the contents.

Types of cold wallets

The most basic type is a cold paper wallet. This is a document that has your public and private keys written on it. This paper wallet will usually have a QR code embedded on it so it can be scanned and signed when you want to make a transaction. The problem with this type of wallet is that if it’s lost, destroyed or illegible, you won’t be able access the funds on it.

Another form of cold storage is a hardware wallet which uses an offline device or smartcard to generate private keys offline. The Ledger USB Wallet is an example of a hardware wallet that uses a smartcard to secure private keys. The device looks and functions like a USB, and a computer and Chrome-based app are required to store the private keys offline. Like a paper wallet, it is essential to store this USB device and smartcard in a safe place, as any damage or loss could terminate access to the user’s bitcoins. Two other popular hardware wallets include TREZOR and KeepKey.

What are some common cryptocurrency scams?

There are scams everywhere on the Internet and cryptocurrency exchanges aren’t immune to them. When you do any kind of business or make a transaction online, it’s always important to be careful and keep cybersecurity at the forefront of your mind. Below are a few common cryptocurrency scams to watch out for.

Fake phone apps

Even places like Google Play and the Apple App Store aren’t immune to fake apps. Scammers can trick people into downloading fake apps that appear to be the real deal. For the unsuspecting person who doesn’t look twice before hitting download, the app can appear to be legitimate, but on closer inspection there are subtle giveaways, such as typos and low star rating.

Phishing scams

Be careful when receiving emails that appear to look like it’s from a legitimate cryptocurrency company. Double check the logo, branding, and email address of the cryptocurrency company that you are dealing with. If you have a feeling that something isn’t right, don’t click on a link as this could give a hacker access to your personal information.

How can I invest in cryptocurrency securely?

Keeping your cryptocurrency safe should be your main priority, so there are our three steps to invest securely:

  • Buy cryptocurrency from an exchange with a good reputation
  • Store the majority of your coins in a cold wallet
  • Keep a copy of the passcode and store it securely (eg. home safe or bank safe)

It’s imperative that you don’t lose the passcode to your wallet. There have been many stories of people who have lost their wallet passcodes and have never been able to access their money, sometimes millions of dollars’ worth of cryptocurrency. Best practice is to do your research on any company that you trade with and store your assets safely.

In closing, cryptocurrency is a secure and excistinew new investment class but it’s important to be aware of the risks and scams, so that you can avoid becoming a victim of cybercrime. The encryption of cryptocurrency makes it a safe way to buy crypto from an exchange and to transfer crypto coins but keeping copies of your passcode is crucial so that you don’t lock yourself out of your own crypto wallet.