As more and more people are dealing in cryptocurrencies, crypto thefts have also been on the rise. A centralised cryptocurrency service does not provide the same level of security as a banking institution. Crypto brokers are also not tightly regulated like stock market brokers and funds lost in transactions can be gone permanently.
Cryptocurrencies are created by blockchain technology in which transactions are recorded in blocks and time-stamped. Blockchain technology does not use a single server to store data and is regularly reviewed by Bitcoin users. Hackers are therefore not able to easily influence this secure digital ledger of cryptocurrency transactions.
But crypto is kept in digital wallets, from where it can be stolen. There are two types of wallets to store your cryptocurrencies -- a non-custodial wallet and a custodial wallet.
Types of wallets
You are in control of the cryptocurrency holdings and private keys in a non-custodial or self-custody wallet.
Private keys are akin to a password and are used to unlock access to a holder’s cryptocurrency.
“(For a non-custodial wallet service), you have the responsibility to make sure you don’t lose your keys and you’re really the only person with that responsibility,” Nick Neuman, CEO of Bitcoin security and self-custody company Casa, told CNBC.
The holder also has to employ back-up mechanisms like hardware wallets to store keys offline. Hardware wallets are like USB sticks. Some investors write down their private keys on paper and keep it in a safety vault.
Some others use non-custodial wallets with multi-signature options. Multisig, or multiple signatures, requires multiple keys stored in different devices or locations.
In a custodial wallet service, exchanges such as Coinbase control the holder’s private keys. The cryptocurrency is held in their wallets while the holder receives an IOU.
Exchanges have two-factor authentication to ensure your crypto is safe, but there are still threats of a breach.
How to protect your cryptos
One option to safeguard digital coins is by storing them in offline hardware. The holder has to ensure that the hardware or paper wallet is safely locked.
It is also important to keep private keys in safe locations.
In custodial wallet service, it is always better to limit cryptos held to that required for trading and exchange only.
The holder can secure the web browser by applying secure and trusted bookmarks before accessing the exchanges and wallets.
The holder can have a multi signature approach for funds in wallets.
It is best to refrain from discussing crypto holdings at public forums.
The holder should also research the third party or the company and check if they have some regulatory framework.
(Edited by : Shoma Bhattacharjee)
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