The year 2022 has been quite challenging for crypto investors. From negative market conditions to countless hacks and bankruptcies, the industry has had its fair share of tough times. The news about FTX’s bankruptcy in particular came as a surprise, reinforcing the need for users to proactive measures to protect their investments.
While the affected investors rue their losses, reflecting on what can be learned from this tragic experience is essential. One such lesson is how crypto enthusiasts can secure their cryptocurrencies so they don’t lose their investments.
There are many methods crypto investors can use to safeguard their cryptocurrency investments (apart from using a reliable exchange), and these methods will be explored in this article.
Considering how FTX mismanaged customers’ investments, transparency is essential to regulating the health of the crypto industry. Merkle tree proof of reserve certificates is the most reliable way for cryptocurrency exchanges to demonstrate that they are qualified custodians. Investors should consider using exchanges that show that all customers’ balances are safely stored and can be withdrawn at any time.
However, Proof-of-Reserves should not be solely considered as the criteria for safeguarding crypto assets with exchanges.
Store Cryptocurrencies Offline When Possible
Cryptocurrency owners often keep their funds as a key with passwords in a digital wallet. It is possible to reduce the risks associated with storing cryptocurrencies by transferring them to an offline wallet. Keeping digital currencies in an offline wallet (also known as cold storage) could help reduce the risks associated with holding cryptocurrencies.
While keeping cryptocurrencies in cold storage may increase the time required to process crypto transactions, the extra safety is worth the wait.
Use 2FA (Two-Factor Authentication)
Using wallets and platforms that require at least two-factor authentication to store digital currency is advisable. As with most logins, the first step to getting access is usually entering a password. The second step could be getting a password on a second device, like a smartphone.
Physical authentication, like a fingerprint or facial or vocal recognition, would be ideal for multi-factor authentication to help keep digital currencies safe, but these methods are not common. Since facial recognition security systems are not easily breached, using such systems should keep funds safe.
Multi-factor authentication isn’t just important for logging in; it can also help users feel more secure when dealing with crypto exchanges.
Store the Seed Words Properly
Those new to the crypto space may be tempted to skip this step or just take a screenshot as a backup. However, users should be cautious of where they keep their seed words.
If crypto holders don’t back up their seed words, they can lose access to all of their cryptocurrency when the device crashes. There are many moving parts in a PC, and these parts wear out over time, so the device will eventually crash at some point.
The best way to avoid losing all the cryptocurrency (in case of device crashes) is to write down the seed words on paper and put them somewhere secure where they cannot be lost. To reduce the risk of losing the paper (and the seed word), simply copy it and hide them in different places. It is recommended to store the seed words in a waterproof and fireproof safe.
The most important point here is to store the seed words on a physical thing that cannot be erased.
Keeping the seed words in plaintext on a PC exposes the user to extra danger. The cryptocurrencies stored in such a wallet would be vulnerable. All hackers need to do is find the image, copy the seed words, and import them into their wallets.
Hence, only encrypted copies of seed words should be kept on a PC (not notepad files or screenshots).
There will always be a copy of the seed words in a key vault unless the user is using a hardware wallet. The key vault allows users to make crypto transactions without entering seed words every time.
The key vault (unlike a plaintext file) is protected with a password. If a hacker tries to get access to the file, they will find only useless content when they open it.
Secure the Crypto Wallet
Crypto holders’ digital assets are only as secure as the wallet they use to store their assets. Users can either use custodial or non-custodial wallets to keep their cryptocurrencies safe.
Custodial wallets refer to digital wallets that are under the control of third parties (such as exchanges and crypto brokerages). These third parties hold users’ private keys and secure the funds.
Although it’s convenient for short-term storage, it’s not a good idea to keep cryptocurrency in a custodial wallet for the long term due to the following reasons:
- Custodial wallets are essentially the same as banks because they are centralized and inaccessible to crypto holders.
- Users cannot have access to their funds without the wallet provider’s permission.
- Having a middleman in one’s business makes it easier for dishonest proprietors to steal funds.
- Crypto holders can lose their digital assets if their wallet is hacked.
Non-custodial wallets are decentralized, and the users hold their private keys. Hence, users will have full authority over their digital assets, and no one can have access to the funds without the user’s authorization.
It is advisable to ignore custodial wallets as much as possible.
This refers to any cryptocurrency wallet that can be used offline. The physical, electronic devices (also known as cold wallets) are specifically created to safely store cryptocurrencies offline.
This wallet requires the user to be close to their computer or mobile device to complete a transaction. Although the cost of a cold wallet is higher than that of a hot wallet (which is typically free), the peace of mind that comes with the safety of one’s cryptocurrency is worth the investment.
Hardware wallets are one of the best options for securely storing cryptocurrency offline. They look like standard USB flash drives, but their sole purpose is safeguarding a user’s crypto holdings offline. Hackers cannot access these wallets remotely to steal the cryptocurrencies stored in them.
Numerous hardware wallets are available, but the most popular are the Trezor and Ledger Nano X.
A multi-signature wallet (also called multisig) is a hybrid between a custodial and a non-custodial wallet. Each co-payer has a private key to the wallet, but they all need each other’s keys to spend money from the wallet.
Multisig wallets need at least two private keys to be provided simultaneously to access the funds on the wallet. No one can make transactions with a multisig wallet unless they have the required number of private keys.
Multisig offers an additional layer of security when conducting crypto transactions.
Withdraw Your Funds
Cryptocurrencies worth millions of dollars are usually kept in exchanges. Hackers worldwide are drawn to them because of the money they stand to gain. Withdrawing one’s cryptocurrency from the exchange is one way to protect it from this potentially catastrophic attack.
If crypto holders want to withdraw their cryptocurrencies, they need to download a wallet and install it on their PCs. They can then ask their exchange to send their crypto to their new wallet address.
After doing this, any hacker that gains access to the user’s exchange account can no longer steal their cryptocurrency. An attacker would have to compromise the user’s computer to steal the funds.
Since users don’t advertise that their PCs hold a tremendous amount of cryptocurrency, they are less of a target than an exchange. An easy and effective way through which crypto holders can reduce the risk of losing their cryptocurrencies is to withdraw them.
- Crypto holders need to be alert and diligent when it comes to securing their digital assets.
- Hackers are constantly becoming more sophisticated in the crypto space. No one wants to fall victim to a new scam. Hence, crypto users must use secure buying and storage to safeguard their cryptocurrencies.
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