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How to Keep Your Bitcoins Safe From Hackers

Updated on March 27, 2014

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Bitcoin Security is Important!

Since its release in 2009, Bitcoin has challenged the traditional ways that the average person controls his or her personal assets. Many people became disillusioned with the fiat money distributed by national governments and lost its value every time the government pumped more money into circulation. Bitcoin offers an alternative. As a decentralized currency that exists solely in the digital world, Bitcoin is not controlled by any national bank or other organization, which means that no group can ever create more Bitcoins than the predetermined 21 million which will be put into the money supply over the next century. Though for several years the value of a Bitcoin never exceeded 1 United States Dollar, the cryptocurrency’s price skyrocketed in 2013-2014 to as high as $1,000 for a single Bitcoin.

As a result, many people who missed the initial Bitcoin craze have ventured to convert some of their fiat currency into Bitcoin. Hackers and thieves have also turned their attention to how they can steal Bitcoins from unaware consumers, and the international media has increasingly focused on the danger of investing money in Bitcoin. Though Bitcoin (and cryptocurrency in general) offers protection from the subtle robbery of inflation, which occurs whenever a government injects new money into circulation, Bitcoin assets are not insured by any external group, unlike fiat currency such as the United States Dollar. If your money is stolen, you will have an extremely difficult time retrieving it, and you may not be able to get it back at all. Moreover, if you lose your money, it is likely gone forever. Thus, if you wish to invest your money in Bitcoin, you need to be sure that you are doing your utmost to protect your valuable assets. There are three main types of Bitcoin storage: online wallets, desktop wallets, and deep cold storage. Read on to learn which is right for you.

Avoid Using Online Wallets

When you create an account on a Bitcoin exchange such as Coinbase, the website will automatically create an online wallet for you, which will look similar to the one pictured below To purchase Bitcoins, you will have to deposit money into this account, which can usually be done via an electronic bank transfer, a money order, or a credit card purchase. After exchanging your money for Bitcoins, the Bitcoins will appear in your online wallet. While they are in your wallet, you can use them to purchase products online, easily sell them back to the exchange if the price increases (and make a profit!), or you can transfer them to a wallet on another online exchange such as Cryptsy, where you can trade them to other people for alternative cryptocurrencies such as Litecoin, Quark, or Darkcoin. Moreover, while the Bitcoins are in your online wallet, you can access them from any computer with internet access, which makes it very easy and convenient to access your funds.

A typical online BItcoin wallet
A typical online BItcoin wallet

Because of the ease and convenience of online wallets, many people choose to leave their Bitcoins there. Unfortunately, online wallets are the least secure places to store your Bitcoins. Because they are stored on the internet, you could lose your Bitcoins forever if a hacker infiltrated the website and gained access to user wallets. This happened to consumers who stored Bitcoins in wallets on the popular Bitcoin exchange Mt. Gox, which filed bankruptcy after losing $450 million in Bitcoins, which it claims were stolen. Because this particular exchange did not store enough coins offline in cold storage (which will be discussed in detail later), most Mt. Gox clients will only receive a fraction of their investment back, if they receive any at all.

To protect your investment, restrict the amount of time your Bitcoins spend in online wallets to as little as possible. What most security experts recommend is storing the majority of your Bitcoins in safer mediums such as desktop wallets and cold storage, and only transferring them into online wallets when you plan on using them immediately and there is no way to do a direct transfer from your desktop wallet.

A desktop computer. Though called "desktop wallets," you can download wallets to any type of computer--even a smartphone!
A desktop computer. Though called "desktop wallets," you can download wallets to any type of computer--even a smartphone!

A Safer Option: Desktop Wallets

Desktop wallets are safer than online wallets because they store your Bitcoins on your computer’s hard drive instead of on the internet. Desktop wallets can be downloaded to any computer with internet access—there are even some wallets for mobile phones—and from your desktop wallet you can send and receive Bitcoins in much the same way as with an online wallet. However, by using a desktop wallet you make your Bitcoins are much harder for thieves and other nefarious individuals to access. Rather than just having to hack a website, now they actually have to gain access to your personal computer. Storing your Bitcoins in a desktop wallet does not immediately prevent theft, though, because thieves can use computer viruses and malware to infect your computer and steal your Bitcoins. Consequently, you must ensure that your computer has adequate security protection from a reputable antivirus and firewall protection program such as Avast! or Norton Antivirus.

A typical Desktop Wallet. Armory is my preferred desktop wallet because it has a reputation as being the most secure.
A typical Desktop Wallet. Armory is my preferred desktop wallet because it has a reputation as being the most secure.

There are a number of popular desktop Bitcoin wallets that offer a mix of speed, size, and security. Wallets like Hive and MultiBit do not take up much memory on your computer, and they are fast and easy to use, which is good for people who are not very tech-savvy. Wallets like Armory and Bitcoin Core take up more storage space and use more CPU when they run, but they offer multiple layers of security that the lightweight clients cannot support. You will have to decide what mix of features and efficiency works best for you, but if you plan on investing even a moderate amount of your hard-earned money in Bitcoin, I would suggest that you seriously consider a wallet that offers the best security protection available.

Keeping Your Desktop Wallet Secure

However, you can prepare for these eventualities by encrypting and making backup copies of your wallet. Encrypting your wallet offers an extra layer of protection against thieves because it requires you to enter a password if you want to send your funds or otherwise make fundamental changes to your wallet. As long as you choose a password that no one else can guess, a computer thief will not be able to access your Bitcoins. However, if your computer becomes infected with a keylogger virus, which tracks what you type on your keyboard, a hacker could potentially steal your Bitcoins if your computer did not have proper antivirus protection.

Once you have secured your Bitcoin wallet, the next step is to make a backup copy to protect you if you lose access to your computer. Most wallets have an option you can click to automatically create a backup copy of the wallet, which you should then store on a secure device such as an USB Flash Drive or a removable computer memory card. You should store your backup copy in a secure place, such as a fireproof safe, both so that you will not lose it and that you will be able to access your Bitcoins in the event of a catastrophe (such as if your house burned down and your computer was inside). Whenever you make a significant fund transfer to or from your wallet, you should create a new backup copy and delete the old one. You should also make a backup copy of your wallet before you update it, which ensures that you can load your Bitcoins into your new wallet.

Many desktop wallets also offer you the option to create a “paper copy” of your desktop wallet. This paper copy will contain a secure code that you can use to access your wallet in the event that you lose access to your computer. After printing your paper copy, place it in a fireproof safe or another secure location, remembering that whoever has access to that piece of paper can access your wallet.

This is an example of a Bitcoin paper wallet.
This is an example of a Bitcoin paper wallet.
A portable hard drive such as this one can be used to place your Bitcoins in deep cold storage.
A portable hard drive such as this one can be used to place your Bitcoins in deep cold storage. | Source

The Safest Option: Deep Cold Storage

Desktop wallets are a predominantly safe and convenient way to send and receive Bitcoins, but if you plan on making a large purchase of Bitcoins which you intend to be a long-term investment, you should further secure your Bitcoins by placing them in "Deep Cold Storage." Any time you place your Bitcoins in a wallet that is not connected to the internet, such as on a flash drive or on a desktop wallet that is not connected to the internet, you are technically placing them in cold storage. Deep cold storage takes the process a step further, virtually ensuring that your Bitcoins can never be stolen as long as you place them in a secure place. To put your Bitcoins in deep cold storage, you should send them to a wallet that is located on a portable hard drive. Once they are placed on the hard drive and you have encrypted the wallet, disconnect the hard drive from your other computer and store it in a secure location, such as a secure fireproof safe (the level of security necessary should match the amount of money you have invested on the hard drive) or a safe deposit box at a local bank or security firm. The only way that a thief would be able to steal Bitcoins that are in deep cold storage would be to both obtain the hard drive the Bitcoins are located on and somehow figure out your secure password that you used to encrypt the files. Most reputable Bitcoin exchanges store at least 80% of their Bitcoins in deep cold storage so that they will not go bankrupt if hackers gain access to their website.

Conclusion

Bitcoin has revolutionized the way that people view and interact with money. Investing in Bitcoin offers you protection from the arbitrary devaluation of fiat currency by the government, and it allows you to send and receive money from all over the world at a cheaper rate than using conventional methods of currency transfer such as wire transfers, money orders, and online payment systems like PayPal. If the benefits of Bitcoin could be summed up in a single phrase, it would be that Bitcoin allows you to take control of your money.


Nevertheless, taking control of your money also means that you must take responsibility for the security of your investment. By reducing the money you place in online wallets and placing most of your Bitcoins that you plan to spend in a desktop wallet, your investment will be much more secure than if you leave them all in an online wallet. If you make a Bitcoin purchase that you consider to be a long-term investment, consider putting a large portion of them in Deep Cold Storage. Additionally, be sure to take the same precautions with Bitcoin that you would with any other type of currency, such as not allowing anyone else access to your account, choosing passwords that are hard to guess, and not informing people about how much money you have invested in Bitcoin. Following these simple rules will ensure that your Bitcoin investment will be safe and secure for as long as you choose to hold onto it.

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    • moviesreviews profile image

      Billy Taylor 2 years ago from NY

      Big thumbs up. This was one of the best hubs on bitcoin I have ever read. Thank you for sharing and I look forward to more of your work.

    • Josh Wilmoth profile image
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      Josh Wilmoth 3 years ago from North Carolina

      Thanks tirelesstraveler! I am glad that you found this guide helpful. I think one of the biggest drawbacks to Bitcoin right now is that it is confusing to people who do not understand it. I am usually pretty technologically-apt, but even I was a a bit mystified at first as I tried to figure everything out. I hope this guide helps people understand it a bit easier!

    • tirelesstraveler profile image

      Judy Specht 3 years ago from California

      Bitcoins have been the hot item on the WSJ front page the last two weekends. I would have been clueless without your tutorials. It is amazing to me the sophistication of the bitcoin wallets.