How to Keep Your Cryptocurrency Safe: Part 2
Part 2 of our 2 part series on keeping your cryptocurrencies safe.
10 Security Best Practices for Cryptocurrency Users
6. Dividing assets in 70–20–10 ratio to diversify risks
In addition to trading on platforms using your accounts and cryptocurrencies, it is common for traders to store crypto assets offline like one would with cash in a safe. Personal crypto assets, whether stored in hard wallets, physical storage, desktop wallets or mobile APP wallets, are recommended to be allocated to cold, warm and hot wallets in the ratio of 70%, 20%, and 10% of assets depending on an individual needs and preferences.
Would you carry your entire net worth around in your wallet?
Most people would consider that reckless, yet cryptocurrency users often keep all their cryptocurrency in a single wallet. Instead, users should spread the risk among multiple and diverse cryptocurrency wallets. Prudent users will keep only a small fraction, perhaps less than 5%, of their cryptocurrency in an online or mobile wallet as “pocket change.” The rest should be split between a few different storage mechanisms, such as a desktop wallet and offline (cold storage).
7. Use a physical wallet that represents future trends
Because most users are far more comfortable with physical security than digital security, a very effective method for protecting cryptocurrency is to convert them into physical form. Cryptocurrency keys are nothing more than long numbers. This means that they can be stored in a physical form, such as printed on paper or etched on a metal coin. Securing the keys then becomes as simple as physically securing the printed copy of the cryptocurrency keys. A set of cryptocurrency keys that are printed on paper is called a “paper wallet,” and there are many free tools that can be used to create them. I keep the vast majority of my cryptocurrency (99% or more) stored on paper wallets, encrypted with BIP-38, with multiple copies locked in safes. Keeping cryptocurrency offline is called cold storage and it is one of the most effective security techniques. A cold storage system is one where the keys are generated on an offline system (one never connected to the internet) and stored offline either on paper or on a physical device, such as a USB memory stick.
In the long term, cryptocurrency security will increasingly take the form of hardware tamper-proof wallets. Unlike a smartphone or desktop computer, a cryptocurrency hardware wallet has just one purpose: to hold cryptocurrency securely. Without general-purpose software to compromise and with a limited interface, hardware wallets can deliver an almost foolproof level of security to non-expert users. I expect to see hardware wallets become the predominant method of cryptocurrency storage.
8. Balance the risk of excessively complex protection to prevent asset loss
Complexity is the enemy of security, especially for the average individual user. The main risk addressed the many security measures mentioned above is the prevention of stolen crypto assets, whether stolen on a trading platform or stolen physically — although, overly complicated security measures could pose greater risks
Although most users are rightly concerned about cryptocurrency theft, there is an even bigger risk. Data files get lost all the time. If they contain cryptocurrency, the loss is much more painful. In the effort to secure their cryptocurrency wallets, users must be very careful not to go too far and end up losing the cryptocurrency. In July 2011, a well-known cryptocurrency awareness and education project lost almost 7,000 cryptocurrencies. In their effort to prevent theft, the owners had implemented a complex series of encrypted backups. In the end, they accidentally lost the encryption keys, making the backups worthless and losing a fortune. Just like hiding money by burying it in the desert, if you secure your cryptocurrency too well, you might not be able to find it again.
One important security consideration that is often overlooked is mortality, especially in the context of incapacity or death of the key holder. Cryptocurrency users are told to use complex passwords and keep their keys secure and private, not sharing them with anyone. Unfortunately, that practice makes it almost impossible for the user’s family to recover any funds if the user is not available to unlock them. In most cases, the families of cryptocurrency users might be completely unaware of the existence of the cryptocurrency funds. If you have a lot of cryptocurrencies, you should consider sharing access details with a trusted relative or lawyer. A more complex survival scheme can be set up with multi-signature access and estate planning through a lawyer specializing in “digital asset execution.”
9. Personal Data Protection and cryptocurrency-related privacy issues
Individuals own their data and cryptocurrency assets.
Personal data protection is a sensitive subject. A single trace can identify and associate your personal information (PII) in the encrypted world to your cryptocurrencies. For example, your online usernames/ID on crypto community forums, your IP address, and smartphone device information, personal infor trading platforms or even if you inadvertently mention on social media the type and quantities of crypto you own. Information about you being the owner of a particular wallet address, the crypto service provider (trading platform or wallet) you use, and even your attendance at a private cryptocurrency conference, etc. All these personal data could be easily obtained by unscrupulous individuals who are looking for easy targets.
Protecting your privacy is part of protecting the security of your cryptocurrency assets but it is also the only way you can avoid the conflict between the encrypted virtual world and the real world.
10. Living in the cryptocurrency world, you will need a security expert friend
“My deposit went to someone’s else address.”
“The customer support of the trading platform said that I was caught in a clipboard hijacking malware, and I will need to immediately use anti-virus software and check the browser plugin.”
“What exactly is a clipboard hijacking malware and what should I do?”
Users in the digital world also face problems similar to those in the real world, especially when it is related to security issues. They have so many questions with no answers and nobody to turn to. Perhaps, having a security expert friend in your daily life would make things a lot less complex.
III. In Conclusion
According to a statistical article by Marko Milijic , as of 2019, the number of global cryptocurrency holders now stands between 13 to 25 million, and this number is still growing rapidly. Cryptocurrency is a completely new, unprecedented, and complex technology. Over time we will develop better security tools and practices that are easier to use by non-experts. For now, cryptocurrency users can use many of the tips discussed here to enjoy a secure and trouble-free cryptocurrency experience.
Read the rest of Crypto 101 on the Bybit Blog.