Bitcoin, Ethereum and Co. Here’s how to keep cryptocurrencies safe online and offline
How to preserve Bitcoin, Ethereum, Cardano and co. Online and offline safely on.
Many investors hold their cryptocurrencies on online exchanges. But hacker attacks show that keeping coins safe outside exchanges can pay off. The possibilities at a glance.
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Cryptocurrencies such as Bitcoin, Ethereum, Solana or Cardano are becoming increasingly popular among investors. In addition to stocks, different cyber currencies are often mixed in with the deposits. Who knows Bitcoin and Co. buys on one of the numerous crypto platforms, but in purely factual terms does not own the coins. They still reside with the exchange in question, but are held and managed there for the client. Similar to other valuables that are stored in a safe, cryptocurrencies can also be physically secured – a good way to keep your cryptocurrencies safe.
Basically, when a customer buys a coin through a crypto exchange, the exchange holds that coin for the customer. If the stock exchange goes bust or is hacked, investors face losses in the millions of euros. Negative examples are Bitgrail, Cryptsy or Mt.Gox.
In the crypto world there is a saying about it "Not your keys, not your coins". This means that only those who hold the key to their coins have sole and full control over the cryptocurrency. And you can only do that on a private hardware wallet – a so-called cold wallet. An overview of how it works and what alternatives are available.
Bitcoin, Ethereum and Co. secure online and offline storage – this is how it’s done
How to store cryptocurrencies safely online
Deposits at crypto exchanges such as Coinbase or Kraken are so-called hot wallets. A hot wallet is connected to the Internet throughout and therefore does not inherently bring the highest possible security, as the provider could fall victim to a hacker attack, allowing third parties to gain access to the customer’s coins. Providers are aware of this danger and try to protect their hot wallets from such hacker attacks as best as possible. However, a certain risk always remains.
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Advantages of hot wallets: Hot wallets offer a high level of convenience to their users. Because the wallet is continuously connected to the Internet, customers can trade their coins quickly and easily via a variety of end devices. Especially those who want to trade regularly can thus react quickly to current price developments – but should take into account the accruing trading fees of the crypto platforms here. The security standard for crypto providers’ hot wallets is already very high. However, there is always a basic risk with this option.
Disadvantages of hot wallets: By their very nature, hot wallets are not the safest way to store bitcoin and co., because they are constantly connected to the Internet. Because of this constant internet connection, hot wallets are popular and primary targets for hackers.
To secure the coins, many crypto exchanges offer their customers additional security options to choose from. The crypto platform Coinbase, for example, offers so-called "Vaults" for individual cryptocurrencies. These vaults add another layer of security for users. To set up such a vault, users need a second email address – for example, of a family member – to legitimize and carry out transactions with the coins they hold.
Here they can see the current bitcoin rate in U.S. dollars in real time. The value may therefore differ from the rates mentioned in the text.
Once users have created such a vault and deposited the respective cryptocurrency, these coins must first be withdrawn from the vault for transactions before they can be traded with them. The withdrawal of the coins from the Vault will only be released if the owners of both registered mail addresses agree to the transaction within 48 hours. For this they are notified by mail. Should a third party now have access to these coins, the registered mail address will be informed of a requested debit. You can now cancel this requested debit within 48 hours. Hackers would have to hack both registered email addresses in addition to the crypto platform in order to access the coins in the vault.
On the one hand, this limits the possibilities for action, since customers can no longer react to short-term price developments, but the security of the coins held is thus guaranteed
significantly increased. Nevertheless, investors should note that even such a vault is only possible via a constant Internet connection and, consequently, is not free of dangers. At the same time, the exchanges themselves already offer a very high security standard. For example, the Coinbase website uses AES-256 encryption, a particularly high encryption standard, to protect users’ banking information. In addition, Coinbase backs up 98 percent of all digital assets to offline storage.
More on the topic of cryptocurrencies
In addition to Coinbase, other providers also offer comparable security tools. The crypto platform Kraken offers besides the general encryption also additional options for the users. The majority of Kraken’s digital assets are stored on a cold wallet. This means the coins are additionally stored offline. Furthermore, users can set up an additional security option with a so-called master key: Investors must enter this master key – in addition to their login – on the platform in order to gain access to their coins.
How to store cryptocurrencies securely offline
One thing in advance: Storing coins offline on so-called hardware wallets is basically the most secure way to store your cryptocurrencies. Cryptocurrencies are stored securely on these hardware wallets or cold wallets, as they are not connected to the Internet or are only connected to it for a very short time. This allows cryptocurrencies such as Bitcoin, Ethereum or Cardano to be stored offline in the long term. These hardware wallets are comparable in appearance to external hard drives or USB sticks.
Basically, the cold wallets have no connection to the Internet, except for the moments when users connect them for transfers.
Advantages of cold wallets: Storing cryptocurrencies offline offers more protection than a hot wallet, as they offer only a minimal attack surface to hackers. In addition, coins held on cold wallets belong to the user himself, as they are not held through a crypto exchange. Only the user has the key to access the coins. Here, no crypto exchange acts as an intermediate station that manages the coins.
Disadvantages of cold wallets: Users of cold wallets, however, have to accept some sacrifices in addition to the high security. Once the coins have been transferred to the corresponding hardware, the responsibility lies solely with the user. For example, if the password is forgotten, access to Bitcoin, Etherum, etc. is not possible. no longer possible, which would mean the loss of the coins. So users should create back-ups and keep the passwords to access the hardware wallet in a safe place.
There are different providers for cold wallets, which look like either external hard drives or USB sticks. Coins held online can be transferred from crypto exchanges on these backup media.