Even though this year hasn’t even reached its middle yet, it has already seen about 10 significant hacks trying to get hold of large sums of money people to hold in cryptocurrencies. After the largest incident in May involving the $40 million that Binance lost to a hack, today another crypto exchange, namely Bitrue based in Singapore, has faced a fraud. In today’s occasion, the sum people have lost reached $5 million. Happily to the customers involved, Bitrue has promised to fund the loss caused by the hack.
The popularity of cryptocurrencies has grown significantly over the course of the last couple of years. Nowadays not only individual buyer hold cryptocurrencies, but also major companies. Due to the increased interest from institutional investors, crypto exchanges have a bigger incentive to secure their platforms. Otherwise, they would be losing even greater sums of money, since institutional investors have a much larger turnover than individual ones.
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However, no matter how much money people and companies are putting into the crypto industry, there is no guarantee that the next hack will not affect your own funds. It doesn’t mean that you should reject buying cryptocurrencies altogether, but rather you need to be very aware of a number of points. On the scale of risks and benefits, cryptocurrencies still have huge advantages, such as the speed and confidentiality of transactions. Of course, it’s very important to choose the crypto exchange you will use very wisely. But you also need to pay attention to the method you’ll use to do so. After all, the ever-growing money involved in the cryptocurrencies attracts more and more scammers to the field.
One of the most important factors of securing your crypto funds, just as with conventional currencies, is the way you store them. The easiest way hackers and scammers can gain access to your cryptocurrency is when the funds are not secured well enough in their storage place. In these terms, there are a few alternatives you can choose from. Both of them have pros and cons which we will describe to you, so that can make a well-informed decision.
- Paper wallet
The concept of the so-called “cold storage” of cryptocurrency means that you should keep your cryptocurrency offline, as opposed to storing the keys to your crypto coins on a server online. The advantage of this method is that hackers will physically have no access to your cryptocurrency if it is not stored online. Thus the only people you would be wary of are actually “real life” thieves. Of course, it significantly reduces the number of people who might try and seize your cryptocurrency. One of the methods of cold storage is creating a paper wallet. It means having your keys accessible only on a physical piece of paper, not connected to any hardware whatsoever. However, in order for this method to be efficient, it needs to be processed properly. Here is where the main disadvantage of this method steps in.
In order to have a secure offline wallet of cryptocurrency, you need to ensure there is no digital footprint of this wallet. It means that you need to use a high-quality antivirus on your computer to make sure that your computer is not infected by a virus. Unless you are sure of this, hackers might access your computer while you are in the process of creating your paper wallet. The next step is to ensure that your printer is not infected by a virus either. In order to do so, the best way would be to print your keys to the cryptocurrency you own on a printer that is not connected to the internet. This way, even if it is infected, hackers will not be able to access it while you’re printing the keys out. Finally, you will need to find a secure place to store your keys in, just like you would do with your actual cash or gold. If you own a large amount of cryptocurrency, we advise you to consider purchasing a safe for it.
- Hardware as another “cold storage”
It is also possible to have a “cold storage” of cryptocurrencies on a piece of hardware that is not connected to the internet. It could be a hardware wallet or a hard drive. Preferably, the hard drive should be encrypted, otherwise, it wouldn’t make sense to store your cryptocurrencies on it. This method is a bit more costly since you would need to purchase special hardware for it. However, it is usually easier to keep it secured rather than a paper wallet that is more obvious.
Another advantage of this type of cold storage is the regeneration of your keys in case you lose them. While a paper wallet will be lost forever if you forget it somewhere, the hardware can regenerate your keys if you delete them by accident. However, you’d need to keep in mind and not lose the hardware itself because then, naturally, it would be impossible to regenerate the keys, even if the hardware has such a function per se.
- Service of a special company
Just as commercial banks historically appeared to help people keep their gold in a secure place, now there are emerging companies, whose sole purpose is to help you keep your crypto coins where hackers cannot reach. Some of such companies would keep your cryptocurrency on encrypted hardware, while others would put it in actual vaults. Basically, they would use one of the methods we have described above. However, these companies have more resources and experience to make the two methods more secure than if you were doing it yourself.
Naturally, this option is the most expensive one. It would be most relevant to people holding a significant amount of cryptocurrency. Some of these companies even offer insurance that will cover your loss in case something still happens to your funds. If the value of your cryptocurrency is high enough that it is worth for you to pay the service fee for these companies, then go for it. The biggest concern in this choice would be to make sure the company you’re dealing with is a legitimate actor and not one of those scammers that you’re trying to secure your money from. Imagine how upsetting it would be to just hand over your funds to the scammers so that they don’t even have to put the effort into trying to seize it. To ensure the legitimacy of the company, make sure to see the legal documents, including their license and the organ they are regulated by.
Trustworthiness of the crypto exchange
No matter how well you store your cryptocurrency, it will not do you much good if you do not use it for your purposes. In order to make transactions or withdraw your funds, you would need to use one of the crypto exchanges or platforms available online. A very important step in securing your transactions involving your cryptocurrency is to ensure the trustworthiness of the crypto exchange before you transfer your money into their account. Take your time to use all available means to check the background of the company. Our recommendation is to find answers to the following questions:
- What is the record of this company? How long has it been operating? Has it had any hack attempts or successful hacks in past? If so, what were the means taken by it to prevent any future frauds?
- What reputation does this company have among cryptocurrency users? Are there more positive or negative reviews? What do they say? Here make sure to check various independent platforms for the reviews, so that you find genuine ones.
- What method does this company use to store the cryptocurrency of its users? While this point might be too technical for some newcomers, you can find valuable resources online that will help you understand the difference between hot and cold storage and other more detailed ways of keeping the cryptocurrency.
- Which country is the company registered in? What are the regulations of that country? In other words, what guarantee do I have from the company that my funds will be returned to me even in case of a hack?
- What way of security does this company use in order to ensure the confidentiality of my private information? How does it secure my Login details (such as my ID and password)? Does it use two-factor authentication?
Try to find out answers to at least half of these questions, preferably to all of them. While you might not be an expert in cryptocurrency security, after finding relevant information about a couple of companies it will be easier for you to compare the companies and choose the most secure option for yourself. Most importantly, never jump into one company with all your cryptocurrency before finding out legal and technical details about the company or comparing it to other options on the market. You might even consider splitting your crypto funds and putting them in a number of separate companies. In other words, not putting all eggs into one basket, in case the basket gets hacked.
Making profit on cryptocurrency without owning it
Funnily, the safest way to ensure you don’t lose cryptocurrency is to not own any. There is a way for you to make a profit (or loss) on cryptocurrency without actually holding any. This is based on the concept of CFD – contract for difference. It can be used for other types of currencies or stocks, but we will consider it in terms of cryptocurrencies.
According to the definition provided by Investopedia, CFD’s are agreements about a future price of an asset, where the profits and losses are paid by cash instead of property or other assets. It means that you can make a contract about the supposed future price of a cryptocurrency without actually owning it. This way, you will be able to collect profit from an increase in the price of a cryptocurrency just as if you owned it and sold it at a higher price.
Naturally, there are both pros and cons to this method too. The positive aspect is that you can make a profit on the declining value of a cryptocurrency too. Whereas if you owned the cryptocurrency, you would only earn money if its price increased. At the same time, the CFD is made for a certain moment in the future and in most cases, it is impossible to change the moment in the future specified in the contract. On the contrast, if you owned a cryptocurrency, you would be able to sell it earlier than you had planned to if the price of the cryptocurrency is dropping. Finally, if you sign a CFD, you will not be able to use it directly for payment or other financial transactions. It is more like bidding rather than having an actual currency.
If you do choose the third option, always remember to invest just as much as you can afford and account for the possible losses. Even though it would be impossible for scammers to get hold of your funds because you don’t own any cryptocurrency, it is still risky because it implies possible loss of funds if your prediction about the price of a currency is incorrect.