To prevent more cases of theft and security breaches in the future, Bitcoin users must implement alternative solutions and strategies to control their own money. Here are some simple yet effective methods.
First thing to understand about Bitcoin
The Bitfinex security breach, which led to the cumulative loss of nearly US$70 million, has become a painful but important realization for most Bitcoin users in the community. It has served as an urgent wake-up call for users who have relied on Bitcoin exchanges to store large sums of funds in contempt of several major hacking attacks that have stolen millions of dollars worth of Bitcoin from exchanges.
Before exploring different methods in securely storing Bitcoin and other cryptocurrencies, it is important to understand that the Bitcoin network lacks a central authority or an organization which can conduct similar operations as banks.
The decentralized and transparent nature of the Bitcoin network makes it virtually impossible for users to reverse their funds in an event of a hacking attack or theft. Thus, proper methods and strategies must be employed to protect user funds from being compromised.
Purpose of exchanges
The primary purpose of a Bitcoin exchange is to enable customers to trade Bitcoin with other assets or currencies like the USD or EUR. It allows users to purchase and sell Bitcoins using traditional forms of payments, such as bank wiring, credit card transactions, and checks.
While an exchange has the duty to protect user funds securely in their systems, the operations of a Bitcoin exchange heavily rely on instantaneous transactions which are performed on hot wallets because of their requirement to send and receive Bitcoins upon the settlement of trade orders.
Therefore, it is important for users to utilize the exchange for its primary purpose, and move the funds once they purchase or sell their Bitcoin to a Bitcoin wallet.
Moving Bitcoin from exchanges to a wallet has proven to be difficult for many users who don’t fully understand the technical side of the network. For beginner users, it is vital to remember that wallets that don’t have any control over user funds are the most reliable Bitcoin wallet platforms. Since they don’t control your Bitcoin, it is not possible for hackers to steal them.
For users who are reliant on mobile wallet platforms, there are certain Bitcoin wallet applications which leverage on the security systems or servers of mobile application distributors. Essentially, these wallet applications are not safe as they can become compromised once the server becomes vulnerable. Therefore, wallet platforms like Breadwallet which does not rely on any external servers and connect directly to the Bitcoin network are better for users for security.
Cold Storage & Alternatives
There are a few exchanges which store the majority of user funds in cold storage. To name a few, Bitstamp and Kraken utilize both multi-signature technology and cold storage to securely manage user funds. If possible, users should store their Bitcoin in cold storage, which basically stores Bitcoin offline, as it eliminates the possibility of theft and hacking attacks.
Users may also easily implement cold storage wallet providers’ API and services to maintain the same level of security in the exchanges their funds are located in. For instance, the popular hardware Bitcoin wallet service provider Trezor explains that while it is better to use hardware cold storage Bitcoin wallets like Trezor or Ledger, users can also embed Trezor account for users and embed secure Login through their API and existing services.
The TREZOR team explains:
“With our TREZOR Connect API, it is fairly trivial to integrate TREZOR to any Bitcoin service e.g. exchanges. As a result, exchange users can create fast orders from their TREZORs without having to switch to another wallet service (such as myTrezor.com).”
With the advancement in the technologies developed by Bitcoin security firms and wallet providers, there are a lot of secure methods and strategies to keep your funds from being hacked or stolen. It is important to understand that Bitcoin is a free and open network which does not rely on a central authority. Thus, users must be responsible for their funds and search for more secure ways of storing them.