For many people, keeping their bitcoins or other cryptos at exchanges and online wallet providers seems safe. In reality, it’s NOT. In fact, if you hold any amount of cryptos without controlling the “private keys”, you are leaving your wealth unprotected.
How to Protect Yourself
There are several steps that you can take to protect your crypto investments. Some of them are pretty simple too. (And some are more advanced, as I teach my students in my bitcoin and crypto investing course.)
Just like a house, though, you want to start with the foundation. The basics.
Step 1. Choose a Strong Password
Yes, choose a strong password. You may be thinking, well of course. Yet, many people who use online bitcoin and crypto exchanges also use easy passwords. I know I’m talking to at least some of you that have passwords like “1234”, or your pet’s name, or my favorite, people just type in the word “password”. This probably isn’t you, but if it is, you first need choose something more difficult.
A good way to start is to create a password with at least 8 characters. Personally I like to use 12 characters or more. It’s good practice to use at least one upper case letter, one lower case letter, and one number. Then fill in the remaining 12 characters with any other characters. Also, don’t reuse your passwords. Many people use the same password for their banking, their cryptos, and their email. That’s a big no-no.
Password generation programs are a great option for creating hard-to-guess password. In fact, they generate tricky passwords like “7cf2;G6a$6Y6″. Now that’s hard to guess!
If you really want to get sophisticated here and generate new hard-to-guess passwords for every website, check out 1Password or Roboform. They generate the hard passwords and keep track of all of them for you, in an encrypted database. They work on Windows, Mac, iOS (iPhone and iPad) and Android. They may cost a few dollars, but they make security much easier. And, you don’t have to worry about remembering all those tough passwords. The password generators do that for you.
Step 2. Setup 2FA
2FA, or two-factor authentication, is a great additional level of security. What this provides is something more than just a password, which can be stolen or hacked. Security experts like to talk about “something you know” and “something you have”. Well, the password is the thing you know. Then, what do you have to help make your bitcoins and cryptos more secure?
How about your phone? Whether it’s a smartphone or a basic mobile phone that can send and receive text messages, your phone is the thing that you “have”. Using 2FA combines your passwords and a special code that is sent to your phone. Both are required to access your accounts. This ensures that even if someone steals your password, they still can’t steal your bitcoins without the code that’s on your phone.
Popular 2FA programs are Google Authenticator and Authy, which major exchanges like Coinbase and Gemini (for advanced traders) support.
Step 3. Don’t Leave Your Cryptos at the Exchange
Bitcoin and crypto exchanges are not banks. They are not insured. (OK, some are, but no one has ever tested a claim from those exchanges.) And, they are not regulated like traditional banks. Some even do some fancy accounting like on Wall Street, like selling you bitcoins they don’t really have to sell. Yes, it’s true.
Just like Wall Street, many exchanges get into “short” positions by selling you bitcoins and cryptos that they don’t yet have. If you then wanted to transfer them out, then they have to pony up the real McCoy. They have to quickly go out and find someone who’s willing to sell them the bitcoin to satisfy your request. In fact, it’s only when you transfer your cryptos, including bitcoins, OUT of an exchange that you really own them. Until then, they are just ledger entries on the exchange’s balance sheet, not yours.
In 2004, a crypto-style “run on the bank” happened at Mt Gox, the largest bitcoin exchange in the world at the time. People were getting wind that they were shorting bitcoins, and that got people nervous. Lots of people started withdrawing their bitcoins and it got to the point where they simply didn’t have the bitcoins they needed to cover their customers demands. And, they failed taking thousands of bitcoins down with them.
If you are going to control your own keys, which is what I recommend to all my students, then you need something called “cold storage”. Cold storage refers to options where you store your bitcoin keys offline (cold), rather than online (hot, like at an exchange). Two popular forms of cold storage are paper wallets and hardware wallets. These two types of offline wallets store the private keys that are needed to control the bitcoins. And remember, whoever has access to the keys controls the bitcoins.
When you set up these cold storage wallets correctly, then no one can get access, as long as you keep your paper or hardware wallets safe. It’s just like keeping something valuable at home, either in a safe or at least hidden from view.
In the new world of bitcoin and cryptos, you are ultimately responsible. You don’t have banks to complain to anymore. You need to control your own wealth for safety and security.
I recommend that you don’t trust your valuable bitcoins and other cryptos to online sites that are not insured, subject to hacking, and have little to no accountability in case something fails.
In short, if you are trading bitcoins or cryptos now, you need to know more about just buying and selling them. You need protect them to ensure that you benefit from the expected long climb upwards that these cryptocurrencies expect to enjoy.
Here’s to your crypto safety AND success!