Cryptocurrency was one of the hottest financial topics of 2017, and for good reason. Investors in Bitcoin saw the price shoot up almost 10x in a year. Buyers of smaller currencies like Ethereum and Litecoin saw even bigger gains. The returns achievable in cryptocurrency dwarf anything in traditional finance. But with reward comes risk. If someone swipes your credit card and makes an illegal transaction, you can call your bank and sort things out. There’s no such safety net in cryptocurrency. One of the keys to investing safely is securing your coins, and we’ve broken that down below.
Public Key Vs. Private Key
You might’ve heard the terms public and private key in the context of Bitcoin. Let’s say you hold some Bitcoin in a wallet, which is a special piece of software or hardware that keeps your coins safe (more on this later). Cryptocurrency transactions are sent to a public key, which is a long sequence of letters and numbers. A public key might look something like: “6GhiAF4rHjiWExsPuD3GDkt3MdtqoAqp2dG5slbTJshfRPslER.” It may not roll of the tongue, but that’s your identifier to other people on the blockchain. If you want to send money to someone, you’ll need their public key, and vice-versa.
A private key is much more important. You’ll share your public key so people can send you funds. But you should NEVER share your private key with anyone. If someone gets ahold of your private key, they get access to your wallet, and all your coins with it. You’ll never see that money again. Guard your private key with your life – never share it, and make sure it’s written down or saved in multiple places. If you lose it, you might be unable to access your coins forever.
Are Cryptocurrency Exchanges Safe?
One reason keeping coins on an exchange is dangerous, is because the exchange holds your private keys. If you’ve looked into buying Bitcoin or other cryptocurrencies, you’ve probably heard of Coinbase, one of the most newbie-friendly exchanges out there. When you buy a Bitcoin through an exchange, it sits on the exchange. The exchange holds your private keys, much like a bank holds your money for you. The only difference is a bank is FDIC insured; if an exchange gets hacked, you’re completely out of luck.
And it’s happened. Mt. Gox was an early Bitcoin exchange that lost 850,000 Bitcoins in 2014. Those coins would be worth about $12 billion today. The exchange Bitfinex was hacked in 2016 and lost 72 million. Exchanges have beefed up security, but the more money they’ve got pouring into them, the bigger target they are for hackers. So you don’t want to keep your coins on exchange.
You’ve got two options to secure your coins: hardware wallets, or software wallets. Popular hardware wallets are the Trezor or Ledger Nano. A hardware wallet looks and acts like a USB drive, except it holds your coins. They’ll run you about $100 minimum, but it’s a smart investment if you’re storing lots of coins. The other simple alternative are software wallets, like BitGo, Armory, Hive, or MultiBit. These are software applications you can download onto your computer to keep your coins safe.
To recap: don’t keep your coins on an exchange and don’t share your private key. Pick a wallet (or multiple) and keep your coins safe and secure. If Bitcoin hits 100K, you don’t want to be kicking yourself that you got lazy with security and someone stole your coins. Keeping cryptoassets safe requires more work than traditional investing, but the payoff is well worth it.