You Need to Care about Storing Cryptocurrencies
We all know the whole process of buying cryptocurrencies is a bit tricky. Especially for those not familiar with using trading platforms or exchanges. Although the process can be confusing at first, its critical to learn the basics of storing cryptocurrencies. Heres why.
When you buy from an exchange, they generate wallets for you, and thus control the private key. As a result, exchanges are vulnerable to cyber thieves who are continuously looking to drain the accounts of users. This is a very real and continuous threat, with former hacks costing users millions. Here are just a few examples;
- 2014 – Mt Gox was hacked for $487M worth of Bitcoin
- 2016 – Bitfinex lost $72 milllion worth of bitcoin in a hack
- 2017 – Nicehash was hacked for $63M worth of bitcoin
- 2018 – CoinCheck left hackers with $534M worth of NEM
Storing cryptocurrencies basics
Blockchain technology uses asymmetric cryptography, which generates a public key from a unique private key. A wallet address for sending and receiving funds is then generated from the public key. Control of the private key is critical, as whoever controls it, has access to funds stored in the wallet.
When you buy some cryptocurrency on an exchange, it is automatically placed in a wallet for you. This wallet is created by the exchange and is managed on your behalf. On most occasions, you can send and receive your coins to other wallets, but the exchange still controls the original wallet. It can do this as it holds and controls the private key.
Following a simple process can protect your funds and give you complete control over them. Once you buy from the exchange, you simply send the cryptocurrency to a wallet where you control and hold the private key. This protects you from exchange hacks and misuse of your funds.
Here are some hardware and software wallets that allow you to control the private key.
Storing cryptcurrencies in a hardware wallet is a safe and convenient way to both store funds, and access them. The devices are physical and come with a small screen and normally two buttons for scrolling menus and entering pins.
Security is enforced by storing the private key inside the device itself. When its plugged in, the private key is accessed by the wallets software, which acts as a user interface for you. The interface lets you access your wallets, manage your portfolio, and allows you to send and receive your funds.
Most hardware wallets cost between $70 AUD to $150 AUD, and store a variety of cryptocurrencies such as Bitcoin, Ethereum, Ripple and altcoins. These wallets provide a cost effective and relatively simple solution for storing cryptocurrencies safely.
Founded in 2012 by Satoshi Labs, Trezor is has become a trusted and secure hardware wallet over the years. Offering two products, the Trezor One and Model T, over 500 different coins can be stored on these devices.
A web interface is used as the user interface to the device, and provides a clean and simple way of interacting. There is also some basic portfolio management tools built into the software.
Trezor uses a mnemonic seed phrase to backup and store your private key. A mnemonic is a set of words that are used to restore your funds in the event the hardware wallet is lost or stolen. It is in essence, the private key to your hardware wallet and must be kept very safe and secure.
Founded in 2014, Ledger has delivered a number of hardware wallet products, including the hugely popular Ledger Nano S. The Ledger range now includes two products, the Ledger Nano S and Ledger Blue. Each device can store a number of cryptocurrencies, including Ethereum ERC20 coins, Bitcoin, and a number of Altcoins.
Like the Trezor, Ledger provides a web-based interface for managing your wallets. More recently, Ledger added a portfolio management tool called Ledger Live. This gives a number of additional financial management features to the wallet, and comes free with the purchase of a wallet.
Akin to the Trezor, the Ledger devices used mnemonic seed phrases to backup your device.
Unlike the hardware wallets, Software wallets do not come with a physical device. Instead, they are a software application which might run on your computer, mobile, or might even be a web-based app.
These type of wallets can be useful and safe for certain use-cases. Mobile apps provide a convenient ‘hot wallet’ solution, whereby you can have some funds available to use quickly and easily. They can also be cost effective if you don’t want to spend money on a hardware wallet, as most are completely free.
Here is a list of some wallets we have personally used.
The Ethos universal wallet is a free mobile app-based wallet for storing cryptocurrencies, and is available on Android and iOS. Designed with the end-user in mind, Ethos has built an intuitive application that currently accepts over 150 coins. We have been using it for several months and have been impressed with it so far.
Some of the features of the app include portfolio management, built-in technical analysis charts, and coin reviews. Additional features coming to the app in the near future include a fiat-gateway and the ability to swap coins using Shapeshift.
Security is ensured by the Ethos smart-key, a single private key backed up using a 24 word mnemonic seed-phrase. This seed-phrase can be stored and used to restore your wallet in the event you lose your phone or it gets stolen. Ethos themselves never stores the private key nor has access to your funds.
A great feature of Ethos is customer support, which is available 24/7. They also recently added SecureHash, which is a feature that allows customer support to provide additional support services.
Bitcoin Core (Bitcoin)
The Bitcoin Core wallet is the ultimate wallet for storing, sending, and receiving bitcoin on a desktop. It is the original wallet developed and created by Bitcoin core developers, and is extremely secure, open source, and widely used.
The wallet operates on top of a full bitcoin node, meaning you will download the entire bitcoin blockchain stored on your computer. This requires around 160 gigabytes of free hard-drive space, and a fast internet connection. The process of downloading and syncing the blockchain typically takes 3-4 days.
Wallet backups and private key management can be completed by using a file called a .dat, or by recording the private key on a text file. Either method provides a backup of the key, and should be stored on an encrypted thumb drive, or on paper. Regardless of the method, the key needs to be stored in a safe and secure location.
My Crypto (Ethereum currencies)
Arguably the most popular wallet for storing cryptocurrencies like Ether and Ethereum based tokens, is the My Crypto wallet. Tokens standards such as ERC20, ERC223, Ethereum Classic and non-fungible tokens can all be stored using this wallet.
My Crypto is both web-based and desktop software based. By downloading the desktop software, new wallets can be generated quickly and easily.
The web-based interface allows hardware wallets such as Ledger and Trezor to be used for storing and accessing Ethereum tokens. We have have a video tutorial on setting up a Ledger Nano S with My Crypto (formally My Ether Wallet) on YouTube, which you can watch here.
Private key management can be handled using a JSON file, or as a 12 word mnemonic phrase. The JSON file should be stored on an encrypted thumb-drive, and the 12 word phrase should be written down and stored somewhere safe and secure.
Tips for storing private keys
Storing your cryptocurrencies by downloading and using a wallet is just one part of the equation. Storing the private key safely is the other part. Here are some tips to help secure and store your private keys.
- If using digital backups such as JSON or .DAT files, consider a 256 bit encrypted and password protected thumbdrive to store them on. They go for around $40 and provide superior security.
- If using paper backups, consider using a diary or notebook to store them in, as you will likely accumulate many backups for multiple wallets over time.
- Never ever leave a private key such as a JSON, or .DAT or even saved on a text file, on your computer. This includes cloud storage such as Google Drive, Microsoft OneDrive or Amazon AWS. These systems can and do get compromised. Always keep your keys offline.
- If you need to connect to the internet to access a wallet, never use public or untrusted networks, as these can be compromised. Consider hot-spotting from your mobile device, or waiting until you can use a secure and trusted network.
- Having a second set of private key backups stored with a trusted family member is a way to provide additional redundancies in the event you lose your own.
Always remember, not your keys, not your coins.
Beau is the Founder & Chief Editor at Cryptocurrency Australia Media, an educational platform designed to help anyone learn about cryptocurrency investment and blockchain technology. Beau is also the Founder & Principal Consultant of Blockchain Management Solutions, a specialist technical and project management consultancy, is an advisor with Masternode Ventures, a blockchain incubator, and is an advisor with THORChain, a new decentralized exchange protocol.