Before we get started on how to back-up, mitigate risks and potentially recover cryptocurrencies, let’s look at some of the risks involved in storing cryptocurrencies. Keep in mind, once your cryptocurrency is stolen, it’s gone for good. That said, you need to protect yourself against hackers.
For example, hackers will look for private keys, so if you have a hot wallet — which is generally connected to the Internet, you would want to make sure your device does not have any malware or viruses. If you are considering using a hot wallet, which is convenient for many, you need to make sure the developers are trusted and legitimate. Hackers may make fake mobile applications for cryptocurrency wallets, only to steal your private key and have access to your digital coins.
Now, let’s take a look at some of the ways to store your cryptocurrencies and the risks involved.
Cryptocurrency exchanges have become a popular way to store digital coins. Generally, an exchange, like Coinbase, holds your private keys that are associated with your user account. That means you are leaving the security up to them. Although it’s convenient because you only need to enter your password and use two-factor authentication (if you opt to use the service), these exchanges do not always protect their data properly. Consequently, if you store your cryptocurrencies with an exchange, your digital tokens are vulnerable to hacks.
With cloud and exchange wallets , your private keys would typically be saved on another server. You’re practically giving your money to hackers this way. If you are going to use online wallets, you should only store small amounts. Otherwise, you could wake up one day and all your digital assets stored on the wallet have been stolen.
Software wallets are “easy to use” or user-friendly. However, if your wallet is installed on your mobile device or computer, it’s only as secure as your device. Since your mobile device, laptop or desktop computer are connected to the Internet, you are exposed to cyber-attacks. Hackers could easily put viruses on your computer to phish for details such as your login and private key.
Additionally, if you are carrying around your laptop or mobile phone, you are vulnerable to thefts. If someone is able to unlock your device and you have a software wallet, your cryptocurrency could be gone for good. Moreover, if your computer or mobile device are damaged and you did not backup your cryptocurrencies, you could lose your digital coins.
A paper wallet is pretty much an old school way of storing your cryptocurrencies. Paper wallets are considered cold storage because they are not connected to the Internet. With a paper wallet, your private and public keys are typically printed in the form of QR codes, and you simply scan these for your transactions. You are in complete control here. Although paper wallets may be inconvenient, you don’t really have to worry about hackers or viruses. All you have to do is guard the piece of paper.
However, there are some risks to having a paper wallet such as theft, the fragility of paper and potential loss. For example, if you only have one copy of your paper wallet and you misplaced it, you could say goodbye to your coins. Moreover, if the paper gets wet or torn to pieces, you could lose your cryptocurrencies.
Hardware wallets are one of the most secure ways to store your cryptocurrencies. Hardware wallets are devices in which you could store your digital assets. Now, there are some risks involved with hardware wallets. When you purchase a hardware wallet, you are trusting the company did not log the private keys and does not have any intentions of raiding wallets. If you are looking to use hardware wallets, you need to make sure the device is not pre-owned.
One of the main benefits to hardware wallets is they could be restored. All you need to do is back up your hardware wallet and keep the details in a safe place where only you and people you trust know about your cryptocurrencies.
By now, you should understand different ways to store your digital currency and some of the inherent risks. That said, let’s move on to how you could back up your cryptocurrencies.
Backing up your cryptocurrency wallet is of utmost importance. In the end, if you securely back up your wallet, you could save yourself from a lot of potential pain. Let’s face it, accidents happen, whether it’s you dropping your phone, or getting your computer stolen, or getting a virus, it helps to back up your wallet.
A backup for a wallet comes in various forms such as an encrypted file containing all the private keys, a private key or a mnemonic seed (the root key could be generated from the seed and the private keys could be recreated).
First things first, you will need to understand the importance of private keys. A private key is just a string of alphanumeric characters representing cryptocurrency in a wallet. The private key provides users with unrestricted access to the digital coin. In other words, the private key proves you are the owner of the cryptocurrencies.
Think about a private key as your signature. When you authorize a transfer or checks to your bank account, you need to sign the back of the check. In the cryptocurrency world, the private key is your signature in a transaction. Now, the private key is encrypted and is not visible to other users.
Le’ts move on to one of the ways to back up your cryptocurrency wallet.
If you have a software wallet, it’s easy to back up your wallet. For example, if you have Bitcoin Core installed on your desktop, you could simply back up your wallet under the “File” tab.
You should always keep a backup of your wallet on another device that’s not connected to the Internet such as a USB flash drive or external hard drive. Once you back up your wallet, you will notice a “wallet.dat” file. The .dat file stores all of the data for your private and public keys. If you lose this, you would lose all of your digital coins stored in those addresses. Hence, you want to guard your backups and password protect them. We would not suggest you store the file on the cloud because you would be vulnerable to potential hacks.
Similarly, Exodus allows you to back up your wallet. Here’s a look at how to back up your Exodus wallet:
All you need to do is select backup, then create your password. Make sure the password is strong and you keep it in a safe place. Once you back up the Exodus wallet, you would receive an email and a 12-word backup phrase.
Now, you need to keep your 12-word backup phrase in a safe place, such as a safety deposit box or locked vault.
You could essentially do this with any wallet that offers backup functionality. Another way would be to use a hardware wallet such as TREZOR or ledger. Nearly every hardware wallet, mobile application and desktop client has a PIN, password or recovery seed. This helps when you are trying to access or restore your wallet.
Another way to back up would be to write down the recovery seed or passphrase, rather than storing a file with your keys. Similar to a paper wallet, you will need to keep the paper in a safe and secure location.
You could also use a hardware wallet as your backup. For example, let’s assume you have two TREZOR wallets . You could use one to access your cryptocurrencies and the other as a backup. When you have two devices, you would initiate the recovery process when setting up the second device.
Thereafter, you would use the same recovery seed used to configure your first device. All you would need to do is follow the recovery process instructions. If you plan to use one device as a backup, you need to make sure the firmware on both devices are always up to date.
With hardware wallets, a recovery seed is always generated for backup purposes. For example, if you decide to purchase the Ledger Nano S, you would first need to set up the device and check using the right hand side button when you are prompted with “Configure as new device?” Subsequently, you would set a PIN. Next, the device will let you know what the recovery phrase is. The recovery phrase is extremely important. Even if you lose access to the Ledger Nano S, you can still restore your cryptocurrencies. However, if you lose your device and the recovery phrase, you would lose all of your cryptocurrencies.
You should have a basic understanding of how backups work at this stage. Now, let’s move on to how to mitigate some risks associated with storing cryptocurrencies.