Post Contributed by Andrew Yang – The Lite School
While one of the biggest advantages of cryptocurrency is its ability to be transacted in much safer ways, due to the blockchain’s way of recording transactions that are near impossible to alter, the empowerment that comes with essentially being your own bank has plenty of its own security concerns. This reality was thrust into the spotlight recently when hackers were able to steal $40 million worth of Bitcoin from cryptocurrency exchange, Binance.
As cryptocurrency users and investors, this unfortunate event reinforces the need for individuals to keep their own funds secure and not rely upon a third party like a custodial exchange. And whether it’s making sure your cryptocurrency is out of reach from hackers and nefarious parties, or protecting it from your own forgetfulness, keeping your cryptocurrency safe can be hard work.
In light of this, here’s a quick guide on how to approach securing your funds. First, let’s talk about wallets.
Hot And Cold Wallets
- Hot Wallet: These wallets are connected to the internet.
- Cold Wallet: These wallets are not connected to the internet.
Between the two, the safest wallet is the cold wallet because it isn’t connected to the internet. This prevents hackers from gaining access to it. You can also add another layer of protection through “encryption” by locking your wallet up with a password. This is an option that is available in some, but not all wallets.
The Different Wallets And How To Secure Them
A) Online Exchanges
There is no way to turn these wallets into cold ones because only the exchange has control over your private keys. Make sure you have different passwords and emails for different exchanges. Also, make sure to only use exchanges that authorize Two-Factor Authentification (2FA). There are two apps that I’d recommend to do this: Authy and Google Authenticator. If you have Fido authentication, then that’s even better.
You can easily download Authy and Google Authenticator onto your phone. These apps then create and cycle through randomly generated numbers which you must input to access your online account. This creates an extra layer of security, but with experts saying that the hackers that comprised Binance were able to access 2FA numbers, it doesn’t mean your cryptocurrency is 100% protected.
That’s why it’s a good idea to only use online exchanges for a short period of time. There’s no guarantee that these exchanges won’t be compromised or available when you need them to be. Beyond vulnerabilities to bad actors, popular exchanges such as GDAX or Poloniex have been known to occasionally be out of service either due to a DDOS attack or their servers being overwhelmed. When these things happen, there’s very little you can do to get your coins back. So, in general, use the exchanges to make your trades and then get off.
B) Website Wallets
You can’t turn website wallets into a cold wallet because they’re hosted online. Even though these website wallets will often require passwords to create an account to access your LTC, there’s not much else you can do to add security. However, some web wallets are starting to require 2FA as well.
C) Desktop Wallets (Recommended Option for Newcomers)
Turn your desktop wallets into a cold wallet by following these directions:
- Download it into a thumb drive, not your computer.
- Back up your wallet by writing down your seed keys. Keep it safe and don’t show it to anyone else. You’ll need this if you ever have to recover your coins.
- Encrypt the wallet with a password. Make sure you don’t forget your password or else you won’t be able to recover your coins.
- Unplug your thumbdrive from your computer.
- If you want to use your wallet, simply plug in the thumbdrive.
D) Hardware Wallets
These have their own security measures, they keep your private keys isolated, and they require you to create a unique pin. Hardware wallets also fit into the “Cold Wallet” category because even though they are connected to the internet, signing of transactions are isolated solely to the hardware device. You can read more about the advantages of Hardware Wallets here, and purchase some of the ones we recommend, here.
E) Paper Wallets
These contain both your public and private keys and are printed on a piece of paper. You can encrypt your address before printing them for the most security. If you don’t, anyone can take your paper wallet, scan the QR code, and spend it. Some people choose to put the paper wallets in the bank or a home safe. Learn how to make them here.
Three Ways To Recover Your Cryptocurrency
Mishaps can be just as costly as threats from nefarious parties. According to studies conducted by blockchain analysis firm Chainalysis, four million bitcoins are believed to be lost forever. That’s close to $20 billion worth of bitcoin! And while this is terrifying, it’s also an ironic illustration of why cryptocurrency is so secure.
These losses can occur in several ways; people can forget passwords, hard drives can become corrupted, and files can be accidentally deleted. Therefore it’s important to understand three different ways you can recover access to your address should you lose your wallet.
Importing, .dat File, and Seed Keys
- Importing/Sweeping your address: Write down your address, your private key, and store it in a place you’ll remember. Having the address and the private key will allow you to recover your crypto if you accidentally delete your wallet. You can do this by “importing” or “sweeping” your address, however only some wallets offer this service. Also, this is a double edged sword. If someone knows your private key, they can take your crypto from you. This is why you should NEVER share your private key with anyone! If you do, you can kiss your cryptocurrency good-bye.
- Backup “.dat” file: Many wallets offer the option for people to back up their wallets. What this does is it creates a “.dat” file with your public keys and private keys. If you delete your wallet, you can simply re-download it again and place this .dat file into the “applications” folder and your cryptocurrency should reappear. This is a bit more complicated but you can find instructions for this online. Also, the correct amount of crypto won’t appear in your wallet until you are fully sync’d.
- Seed Keys: Some wallets, like Electrum LTC, allow you to restore your wallet through Seed Keys. Seed keys allow Electrum LTC to retrieve the private keys to recreate your address. When you first open up Electrum, it’ll give you a sequence of words. It is IMPERATIVE that you write down the exact words IN ORDER. If you don’t, then you won’t be able to recover your LTC. So write this down and don’t share it with anyone. Keep it in a safe place. And while writing it down is a good step, considering something like our Cobo + Litecoin tablet will ensure you don’t go through all the trouble of writing down and storing you seed and recovery phrases only to have them lost to natural threats like water or fire.
So while being your own bank requires a whole new way of thinking about storing and securing your funds, the empowerment that comes with it is undeniable!