Security is a huge topic, and the first thing to understand is that security is not an on/off switch. Security is actually a sliding scale. Due to the fact that cryptocurrency is valuable like money, it is an attractive target for thieves. By taking the time to learn a couple concepts you can greatly increase the security of your crypto wallet. Use this article as a starting point for protecting your funds.
With cryptocurrency, you are your own bank. If funds are lost or stolen there is no recourse, so taking preventative steps to protect your crypto is essential. The main threats in the crypto world come from either lost funds or stolen funds. Both can be prevented, let’s learn how.
How to protect against lost funds
The most important thing you can do is to backup your data. Usually, your crypto wallet will provide you with a 12-word seed phrase. This seed phrase is actually used to generate your wallet, and you can regenerate your wallet at any time with all funds intact by using this 12-word seed phrase.
To protect against lost funds, write down your seed phrase on a piece of paper and store it somewhere safe. By doing this simple step, if you ever lose your device, if your device ever crashes, you can simply regenerate your wallet and all of your funds will be right where you left them.
How to protect against stolen funds
To protect against stolen funds, first generate a secure and unique password. It is wise to use a new password, one which is not used on any other sites. Look into using a password manager or password generator, which are programs that handle creating and storing strong passwords.
The next step is to understand the phrase ‘Trust, but Verify.’ This is a popular phrase in the crypto community, sometimes you will see it referred to as ‘Don’t trust, verify.’ The idea behind both phrases is the same – always double check sources and do not blindly trust people. By following the ‘Trust, but Verify’ principle you can actively avoid scams.
Cryptocurrency is like digital cash, and to use digital cash you will need a wallet. There are many different types of wallets in existence, and each wallet provides a different level of built-in security.
- Hardware wallets – Hardware wallets provide the most security, because it protects your private keys from being transferred out of the wallet. (What are private keys?)
- Offline wallets – Offline wallets are good for long term storage, and prevent any theft by not being connected to the internet. An offline wallet can a wallet app that runs on a device not connected to the internet, or could be a paper wallet that is stored securely
- Non-custodial wallets – Also referred to as self-hosted wallets, these are wallets that run as applications/programs on your device. These wallets provide full control over the private keys, and steps must be taken to secure them, like using strong passwords.
- Custodial Wallets – You can think of custodial wallets like a brokerage account or a bank account. You own cryptocurrency, but the actual coins are being held by a 3rd party. When funds are stored on crypto exchanges, this is a custodial wallet. It is important when using a custodial wallet to find out if funds are insured or not.
When first starting with cryptocurrency, the two most important security steps you can take is to always use a strong, unique password and backup your 12-word seed phrase. Doing these two steps will get you going in the right direction. As you learn more, you can apply more advanced methods like full-disk encryption, and storing funds in an offline wallet.