Even though the cryptocurrency industry has only achieved broader attention in the past few years, there is already a narrative that is so common as to be almost pedantic. An individual, or perhaps an entire digital currency exchange, is subjected to malicious hacks. The result is that a large quantity of digital currency goes missing. The hackers seem to disappear into the void of the anonymous internet space, never to be seen or heard from again. With them, they take a huge amount of money, stored away in digital assets that are impossible to trace or recover.
This story has become a common one, and it may even be so common that it has discouraged some investors from taking part in the digital currency space at all. Indeed, while the cryptocurrency space is growing and changing at an astonishing rate, so too are the methods thieves and hackers use to steal tokens and coins. Nonetheless, investors who are vigilant and prepared can take precautionary measures to protect their digital holdings.
Wallets Are Key
Many investors buy up a popular digital currency like bitcoin or ether on an exchange, only to keep the currency on that platform. Digital exchanges take their own safety precautions to prevent thefts, but they are not immune to hacks. One of the best ways to protect your investment is to secure a wallet. There are two primary types of wallets, although new designs are coming into play all the time. Of these, hardware devices are perhaps the best option. These physical (or "cold") wallets look like USB drives and act as a physical store for tokens or coins. Each hardware wallet is linked with a private key, that is a password-like bit of code that allows you to decrypt the wallet and access the coins or tokens that it stores. While hardware wallets are tremendously effective against digital thieves, there is also a risk: Lose your password key, and you'll never recover the contents of the wallet.
Other Types of Wallets
For those a bit squeamish about introducing a physical device into a digital currency investment, there are also secure online wallets. These work in much the same way, without the handheld device. Similarly, online wallets tend to also have private keys that are not recoverable, so it's absolutely essential that you store your private key in a secure location that you'll remember. Individuals have gone to extreme measures to record their keys, keeping them in safe deposit boxes or as encryptions in graphic files. Some users have even gotten tattoos with their key information.
Paper wallets are a particular type of online wallet. They are generated by web platforms such as BitAddress or WalletGenerator. These applications create bitcoin addresses and private keys that can then be printed out. The CryptoHex wallet takes the process a step further. Rather than printing the key information on a piece of paper, this service writes or punches it out on a strip of metal.
Desktop wallets are another option. They are not directly linked to the internet. However, there are viruses that are designed to retrieve information for these wallets, so they may not be as secure as the options above.
Digital Currency Exchanges
Most transactions involving cryptocurrencies are done via a digital currency exchange. These platforms are typically accessible via web browser or app and require that users make buys and sells either using a fiat currency or a different cryptocurrency. Cryptocurrency security experts recommend against keeping any digital currency holdings on an exchange for two primary reasons. First, if the exchange is hacked, you may lose your holdings. Second, the exchange holds your cryptocurrencies on a type of IOU basis; if the exchange folds for some reason, you may not have recourse to recover your holdings.
Although savvy investors in the cryptocurrency space typically move their holdings out of the exchange platform once they've completed a transaction, there is nonetheless a necessary amount of involvement on the exchange in the process. For that reason, cryptocurrency investors are cautioned to choose carefully when determining what exchange to utilize. In many cases, popular digital currencies like bitcoin, ether and ripple are available on a huge variety of different exchanges. These exchanges are not all the same with regard to safety and security; a bit of due diligence is required on the part of the investor to be sure that he or she is not adding unnecessary risk into the transaction process by operating on an unsafe exchange. In the case of other digital currencies, particularly those that are less popular or newer to the scene, the exchange options may be more limited. In any case, if an exchange seems to lack security, it's likely best to avoid it.
Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns bitcoin and ripple.