If the cryptocurrency market is serious about attracting institutional investors, then the deciding test will be ‘is my investment going to be safe’? This is a legitimate question to ask of digital currency, especially when it can’t be touched or physically traded. There’s been plenty of talk regarding cryptocurrency security as a decentralized peer-to-peer financial network, allowing traders to send and receive information safely online.
While the blockchain itself is secure, its login process and storage capability is vulnerable to hacking, and if you lose your private key, there is no way to recover it and there’s not a bank looking after your assets You can’t reset your crypto password if you forget or lose the security combination.
A hardware wallet, or cold storage solution, is designed to provide extra security for investors by storing private keys offline. Hardware wallet investors will receive an encrypted private key on the device that offers protection against hackers and viruses. At present, there haven’t been any successful incidents of large-scale hardware wallet hacks. Cold storage devices are also resistant to viruses making it a more secure place to store your cryptocurrency.
Investors will keep most of their funds in cold storage for security reasons but store a percentage online to transact with other traders.
Cyber intrusion on the blockchain
In 2018, the cryptocurrency sector suffered three major hacking attacks: Coincheck, Bithumb, and Coinrail. The South Korean exchange, Coinrail, said in a statement that it was hit by a “cyber intrusion” causing a loss for about 30% of the coins traded on their exchange.
Coinrail said: “Seventy percent of total coin and token reserves have been confirmed to be safely stored and moved to a cold wallet. Two-thirds of stolen cryptocurrencies were withdrawn or frozen in partnership with related exchanges and coin companies.”
These hacking incidents highlight the importance of keeping your cryptocurrency in a hardware wallet. By storing your assets in cold storage (i.e. somewhere not connected to the internet), you’ll have peace of mind that your currency is safe from hackers and thieves.
Protection against data loss
While hardware wallet solutions provide security against hackers, they also guard against data loss. According to Newsweek, around 2.78 million bitcoins have gone missing since 2009. That’s equivalent to $30 billion in today’s market. A great example of the fragility of cryptocurrency is the story of James Howels, a British IT worker, who in 2009 accidentally threw out his computer hard drive containing 7,500 bitcoins (worth an estimated $4 million at the time). His cryptocurrency now sits buried in a landfill site near his home in Newport, Wales.
Howels wouldn’t be mourning a projected loss of $108 million if his Bitcoin had been stored offline in a hardware wallet. In the event that you lose your device, your recovery sentence or passphrase will allow you to recover everything on a new device.
If you misplace your device, you can buy a new one, choose ‘recover wallet option’ and enter your password. If accepted, you will have access to your currency once again. Additionally, if you have a secure PIN enabled then your device is useless in the hands of a thief.
Security and Multisignature Infrastructure
With cryptocurrency becoming increasingly mainstream, the need for secure methods of storing it has never been greater. If the market wants to encourage new institutional investors, then safer ways of holding large amounts of cryptocurrency is required.
Multisignature (multisig) is where more than one key, usually involving three or more entities to permit the movement of funds, is adopted to authorize a crypto transaction. Combining cold storage with multi-sig through the dispersal of private keys across different storage solutions has become a standard practice for institutional crypto security.
Cold storage solutions aimed at corporate institutions and individuals will go a long way towards making the blockchain more secure. It’s safe to say, if there were no offline safeguards to store digital assets, it would seriously jeopardize the marketplace’s prosperity. This is why hardware wallets are going to have an influential impact on crypto’s long-term success.
The rising demand for hardware wallets has shown the awareness of investors with regards to offline security. These hardware devices will continue to grow in popularity as cryptocurrency goes mainstream. Moving forward, the best way to get investors on board is by making the existing infrastructure more secure and easier to use in the future years — so institutional investors are more comfortable with what cryptocurrency has to offer.
Ken Holder is the chief engineer at KeepKey, makers of secure hardware wallet for crypto assets. He has been involved in cryptocurrency since 2011 and is an enthusiastic supporter of the ideals of decentralized currency and autonomous computing.