How to keep your crypto safe
Here’s how to keep your cryptocurrencies safe in 2021!
One of the basic philosophical ideas of cryptocurrencies is our own sovereignty, the possibility for the user to manage their own money as their own banks. Take the right security measures and it will be harder to compromise than the best guarded bank safes. If we make a mistake, we will allow someone else to clear our accounts remotely.
Well, that's not what I meant: 😆 (Photo credit: https://pxhere.com)
So it is definitely worth going through the steps to see what opportunities we have to know our assets safely.
What is a private key?
The private key allows you to spend your cryptocurrencies. It’s a pretty long string of numbers, so it’s almost impossible for someone to figure it out by guessing. If you take a coin and throw it 256 times, the head is say zero, the writing is the one, then you've already got a private key when you record the throws. If you encode this in hexadecimal, that is, numbers 0-9 and use letters a-f for this, you will get a string like this:
f15a4e1f737636a0b1656ab2f5849a8f9bab119632f2a1e158b9929a7d2b79f8
The number of possible private keys is greater than the estimated number of atoms in the universe. In the case of Bitcoin or Ethereum, therefore, it is a particularly safe way to protect goods. They are safe because they are protected by an amazingly long code.
If you have already completed a transaction, you know that there is also a public key that serves as the address. This also appears to be a random sequence of numbers, but is generated from the private key using cryptography. Thus, a public key can be generated from the private key at any time, but knowing it, we cannot decrypt the private key. Therefore, you can share it with others, you can even post it on your website or blog if you want to accept donations for it.
So the private key is important, and that is the most important, as it is necessary for you to have control over your money.
Cold wallets
(Photo credit: bitcoinbazis.hu)
Cold wallets eliminate the biggest threat, the network connection, by keeping the keys offline. Still, it is still possible to initiate transactions with them, even if it is a little more complicated or lengthy.
We are creating a transaction. In the case of so-called UTXO-based cryptographs, we specify the data (who sends, how much to send, where to send), thus creating a “skeleton” of a transaction. This is nothing yet, we first need to provide this with our own digital signature to prove that we are the ones we want to send and we also have the right to it because it is our money.
Signature
(Photo credit: https://utikalauzanatomiaba.blog.hu/)
This will prove to the other members of the network that the transaction is genuine. This is where the private key comes into the picture, with which the transaction is signed, so we were able to create the executable, signed transaction. Implementation. After signing, we can even execute the transaction immediately, but we can also wait with it. The point is that it has to be delivered to the network somehow, because until it is included in the network memory, it will not be included in a block, so it will not be executed. It’s like having a completed, signed voucher until it’s redeemed, just a piece of paper, or in this case, a signed transaction, a transfer order.
Hardware wallets
Interestingly, these steps do not have to happen on the same device. You can create the transaction on machine 1, sign it on 2, and send it to the network on machine 3. This is exactly why cold wallets work, and so do hardware wallets. You generate your keys on machine 2 and it is always offline. Even if 1 and 3 are infected, it doesn’t matter because the key is elsewhere, safe, and once a transaction is signed, it can’t be modified from there. All that matters is that machine 2 is not online. You don't really need 3, you can also use 1 to send.
This is where the hardware wallets enter the picture, as they take over the role of machine 2. They have the private keys on them and sign the transactions without having to be online. They are as convenient as an online wallet, but much more secure.
It’s no coincidence that the hardware wallet manufacturing sector has seen significant growth in recent years, and today we can choose a device from a wide range.
Who stores the cryptocurrency?
The solutions mentioned so far are where you own the keys and thus the crypts. But if, for example, you use the stock exchange service of an exchange, the keys are not with you. So you don’t really have the coins either, but the stock market handles them in your name. In most cases, stock exchanges use a combination of online and cold storage to keep users ’money safe.
When you trade, the system rewrites your balances on that pair in its own database. You don't even need a block chain to do this. This is necessary if you decide to allocate your cryptos to another address, in which case the exchange will sign the transaction and send the coins to the specified wallet. If one is not bothered that someone else has control over their money, stock exchanges are also a convenient solution. If you lose your password, you simply ask for a new one. If, on the other hand, you have complete independence and you manage your own money, losing your keys means losing your money. There is no one to turn to for help.
What can still be a threat is the theft of credentials, so it is recommended to use a strong password and two-factor authentication for stock exchanges.
Which is the best storage solution then?
Unfortunately, there is no universally, always a perfect method for everyone. It all depends on how personally you tolerate each type of risk and how you use your cryptos for what purpose.
If you trade all the time, what matters in a sense is different from that of a long-term hodler. And if you run a company that handles a particularly large amount of money, again, you’ll only need other methods for security than the average user.
It’s safest to keep inactive coins in a cold wallet, for which hardware wallets are best. Have a backup of the keys and seed words if the device itself is lost or damaged.
Online wallets are good when it comes to smaller amounts. Like your traditional wallet, where you keep the money you need for daily shopping. We’re not talking about the same amount as you have in your savings account, right?
If you trade, lend, or do stake mining, storage providers are also good, but consider carefully which one to choose. And never invest more than losing is no problem!
A wide range of storage options are available in the cryptographic industry today. Whichever one you choose, there are pros and cons, we need to be aware of these. The point is that the chosen solution also meets our needs and is comfortable to use.
Seed words
Today, most wallets are no longer simply used to store a private key. Today, we use so-called hierarchically defined wallets, which means that the application can handle many keys at the same time. You need to know the seed words that are used to encrypt these keys, which will always be used to create the same keys. A seed row might look like this:
clock happy easy change slim image brilliant welcome rider next point napkin
Unless you want to use only private keys, when installing most wallets, the program also warns you to save the seed words for yourself.
Digital signature
As already mentioned, private keys and public keys work in pairs using cryptography. With these, we can create digital signatures to prove that the sender of the message is really who he says he is. When you start a cryptocurrency transaction, you sign your message, the transaction itself, using the private key. And the host can easily verify, by comparing the signature with the public key, whether it really came from the right person.
When you spend your crypt, most of the time you actually give the system a kind of referral order: "I pay X coint to address Y." And you sign this with your key so you can prove that you really own those coins. And when the transaction is added to the blockchain, anyone can verify the same by checking for authenticity. Without having to give out the private key out of your hands.
Cold storage vs online wallet
Wallets can basically be of two types. Online wallet programs or cold wallets. Within these, we have a wide range of models. Let's see these in a little more detail!
Online wallets, by their name, are those that have an Internet connection and are installed on a mobile or computer. They provide the most convenient usability. It is easy to send, receive, or trade, but there is a price to pay for this convenience.
And the biggest vulnerability stems from the live Internet connection. Even though private keys are not sent over the air, the device can still be infected with malware that allows an attacker to remotely access our assets. You can’t say they’re unsafe, they’re simply less so than cold wallets.
For convenience, there is nothing better than these, so most, especially when it comes to lower amounts, prefer these.
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