Should You Store Bitcoin Online?
By Nick Anderson 5 minutes
There is a saying that goes in the cryptocurrency community: “Not your keys, not your coins.” Which describes the reality of owning cryptocurrency and why it’s crucial to protect the digital wallet.
Contrary to what many think about digital wallets, it’s more of a place to store the encryption keys than the information about how many coins you own. Bitcoin being the most popular cryptocurrency in the market has several digital wallets, paid and free. The wallets allow you to store the information about your Bitcoins and the private key that is needed to sign a transaction.
You may have already drawn an idea of why protecting a digital wallet is so important. Let us discuss whether is it safe to store bitcoin online.
What is a Bitcoin Wallet?
A Bitcoin wallet is a place to store cryptocurrency. The easiest example is a physical wallet that holds cash and cards. Every time you make a purchase, some currency is pulled from the wallet and used for a transaction.
Your credit card requires a PIN code to authenticate a transaction. It serves as proof that the card belongs to you. Because if the card was lost, anyone could misuse it and withdraw your hard-earned money. In the same respect, the cryptographic key known as the Private Key is used to authenticate a transaction. Since only you hold the key, it’s a safe way to know that the transaction must be coming from you.
So, essentially, the wallet stores your key that verifies you are the owner of the Bitcoin address. There are a few of the safest and best Bitcoin wallets available that you could consider.
What is a Hot Wallet?
A hot wallet is just like the physical wallet that you carry in your pocket. The term hot wallet is used to differentiate from a cold wallet. The two store your Bitcoin information and the private keys, but the terms have been popularized to nominate the idea that you should not keep all of your coins in a hot wallet.
A hot wallet is connected to the internet, which makes it vulnerable to an attack. If the wallet is compromised and your keys are lost, you can lose your precious Bitcoin.
A cold wallet, on the other hand, is not connected to the internet. They are also known as hardware-based wallets because they also come in the form of small devices that plug into your computer like a USB thumb drive. These devices run their own operating system and firmware and only get access to the internet when you connect them to a computer.
Is it Safe to Store Bitcoin Online?
Aside from apps that let you store Bitcoin, cryptocurrency exchanges also serve as a hot wallet for the Bitcoin you own. Cryptocurrency exchanges, such as Binance and Coinbase, are trading platforms that let you interact with other people for trading.
Any cryptocurrency that you buy gets stored in the exchange’s account. The exchange will handle any transaction you make. What that means is that you do not own the private keys, but the exchange does.
It presents a huge risk because if the online exchange is breached — which they have — you can lose your private key. Liquid was attacked just last month, and it was revealed that hot wallets were compromised, forcing the cryptocurrency exchange to suspend transfers and withdrawals. The Singapore-based cryptocurrency exchange, KuCoin, was breached last year in which hackers were able to transfer cryptocurrency from hot wallets.
A hacker stole over $600M in cryptocurrency from Poly Network, making it the biggest online heist in history. The money was returned eventually after negotiations with the hacker pursued, but it proved what should be common knowledge: cryptocurrency exchanges are not safe.
Cryptocurrency exchanges getting hacked is recurring news in the cryptocurrency news. The exchanges try to minimize the damage by storing their holdings in cold wallets and only keeping some amount in a hot wallet for trading.
Your chances of receiving back your assets are only real if the cryptocurrency exchange is able to recover them or offer some insurance. But the fact is that people have been deprived of their earnings. Just look at what happened to QuadrigaCX’s customers in 2019. After the CEO’s sudden death, it could not return the $190 million to its customers because only he had access to the cold storage.
Safe Way to Store Bitcoin Online
The safest way is to keep your Bitcoin stored in a cold wallet – most of them. Only keep small amounts in a hot wallet. Cryptocurrency exchanges allow you to connect cold storage for moving funds. Again, keep in mind that it’s really about your private keys than the information about your coins.
- Connect a cold wallet and store the bulk of your Bitcoin in it.
- Enable multisig for protection against unauthorized transactions.
Multisig is a feature that adds another person to authenticate the transaction. It is useful if you have large amounts of Bitcoin or are a business that uses cryptocurrency to make payments.
Cold storage is ideal for long-term storage because they are not exposed to malware on your computer. The only time it’s connected to the internet is when you have to withdraw from it. And because they have only one function, which is to store cryptocurrency, they are not overwhelmed by other functions that a typical operating system does. Lastly, while for those who engage in mining Bitcoin, it’s always a safe recommendation to use a VPN with it.