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How to Store Cryptocurrencies Securely

Cryptocurrencies have now established themselves as an asset class. Specifically, the market has consolidated, with widely known cryptocurrencies like Bitcoin and Ethereum leading the field. Crypto exchanges provide liquid trading venues, with some also offering a social network. Numerous mining pools have formed worldwide for the creation of new coins.

In a mining pool, multiple entities join forces to mine a cryptocurrency together. A Bitcoin mining pool combines computational power to increase the chances of jointly discovering a block and earning the block reward. The concept of Bitcoin (BTC) includes that new coins are created by calculating blocks in the blockchain. This process resembles a cryptographic puzzle, and the calculations to be solved automatically become increasingly difficult. Initially, a regular home PC was sufficient for successful mining; today, ASICs are commonly used.

ASIC miners are computing machines that excel at a specific type of calculation and are now the standard for mining hardware. Mining pools are the most popular method for obtaining coins without such specialized equipment. In these pools, the computational power of PCs is combined online using software protocols. If the pool successfully mines a block, the reward is automatically distributed among the pool participants. Well-known pool organizers include Antpool, BTCC Mining Pool, and Slush Pool. Mining pools are formed not only for BTC but also for Ethereum, Litecoin, and many other Proof of Work (PoW) cryptocurrencies.

Challenges and Opportunities of Cryptocurrencies

As with all investments in innovative technologies, crypto investors face certain challenges. From a macro perspective, the ESG compliance of the underlying blockchain technology and national governments' regulatory efforts—one of the causes of high volatility—are particularly noteworthy. The latter is becoming increasingly important as the digitalization of currencies under the term decentralized finance (DeFi) threatens to impair central banks' control capabilities.

Challenges of Cryptocurrencies for Investors

Almost every cryptocurrency investor faces the immediate challenge of securely storing their data. Besides online storage media like software and desktop wallets, ledgers and paper wallets are considered the safest methods for storing crypto access data. The significant advantage of physical wallets is protection from hacker attacks, as they are only briefly connected to the internet. However, ledgers or paper wallets must also be protected against theft. Losing this data poses a significant risk to the owner.

What is a Wallet and How Do I Protect It?

A wallet manages cryptocurrencies like Bitcoin, Ethereum, Litecoin, and other altcoins, but they are not stored directly within it. The wallet actually contains the private and public keys that allow access to the addresses and thus the users' holdings. A wallet is not a physical wallet and bears no resemblance to a traditional wallet. Instead, the wallet is a storage location for addresses, public, and private keys. These are needed to access the public address in the blockchain and thus the owner's cryptocurrencies, such as Bitcoin.

To be precise: A single wallet can contain multiple private keys. You can create as many wallets as you want. In fact, most cryptocurrency owners use multiple wallets to ensure maximum security for their various cryptocurrencies.

How Does a Cryptocurrency Wallet Work?

A cryptocurrency wallet does not resemble a traditional wallet. Imagine it more like a safe or treasure chest. To access these assets, you need a key in the form of a password. Anyone who knows the storage location (public address) and the corresponding password (private key) can access the wallet. Knowing the storage location alone is not a problem, as the holdings are securely stored in the blockchain. However, if the owner loses their keys or they are stolen, they can no longer access them, or another person gains access to their assets. Therefore, keys should be protected and stored in a secure place, such as a wallet.

Is the Wallet Alone Secure Enough?

There are many different ways to store cryptocurrencies. Cryptocurrency owners can choose the wallet that best meets their needs. Here is a list of different types of crypto wallets:

Hot Wallet (Exchange/Trading Platform)

The simplest way is to store your cryptocurrencies on the trading platform or exchange where you bought them. Simple, however, does not mean secure.

Software Wallet (Desktop / Mobile / Online)

A software wallet offers high user-friendliness and high security. The holdings are stored on a computer desktop or mobile device. You can instantly access your cryptocurrency holdings and have full control over your private keys, which are stored in a “single wallet file.” For security reasons, this file is also encrypted, meaning you can use a custom passphrase to access it.

A passphrase consists of more characters than a password. The use of longer and harder-to-guess character strings provides greater security. A passphrase can be used for encryption, signatures, or IT system access protection. Passphrases can contain 100 characters or more, and the use of spaces is possible. You can use a separate wallet for each cryptocurrency you own or a software wallet that can store multiple cryptocurrencies.

Hardware Wallet

Hardware wallets offer a very high level of user-friendliness and security, making them arguably the best option for storing cryptocurrencies. The private keys are stored on a cryptographically secured hardware device and cannot be read in plain text. Therefore, hacker attacks are nearly impossible, even if a computer is infected with a virus. To ensure hardware wallets have not been compromised before purchase, never buy used hardware wallets and always obtain them directly from trusted manufacturers.

Paper Wallet/Physical Wallet

A paper wallet can be easily created. On specific websites, you can quickly generate a public address and the corresponding private key. It only takes a few minutes to create a paper wallet. Open-source services are available online but generate the keys on the user’s device. This means the keys are not sent to the user over the internet.

What Comes After the Wallet?

The cryptocurrency is securely stored in a wallet, but what can happen to the cryptocurrency itself, like Bitcoin?

Can a Cryptocurrency Be Hacked?

Bitcoin is considered hack-proof because the Bitcoin blockchain is constantly verified by the entire network. Therefore, attacks on the blockchain itself are highly unlikely. To add a new block with bundled transactions, each participant (miner) updating the Bitcoin database continuously solves complex mathematical problems.

These complex mathematical problems arise from Bitcoin’s cryptographic hash function. When a particular block is added to the database, each node in the network must agree on the validity of that block. Only when all nodes agree is the Bitcoin database updated accordingly.

In a network, a node is a connection point. It can be either a redistribution point or an endpoint in data transmission. Generally, a node can recognize, process, and forward transmissions for other network nodes. A network node typically has at least two, but usually more, connections to other network elements.

Thus, manipulating the cryptocurrency network is almost impossible. The decentralized, chronological, computing, and powerful Bitcoin blockchain not only prevents the deletion and overwriting of an already validated Bitcoin block but also double spending. Double spending refers to the double expenditure of the same units of a cryptocurrency.

How Can Bitcoins Be Stolen Then?

Most cryptocurrency thefts involve users and websites that do not take proper precautions in storage. Coins are often stolen from locations where they are not securely stored. For example, a "hot wallet" is any cryptocurrency wallet connected to the internet or "online." Hot wallets can be desktop or mobile wallets or wallets hosted by an exchange that failed to update its security measures to the latest standards. A hot wallet can also refer to private keys stored carelessly on a tampered, hackable device.

Humans Are Weak, a Safe Deposit Box Is Strong

Since cryptocurrencies are assets, extra caution is necessary as they could easily be stolen without the owner noticing immediately. Therefore, one should treat Bitcoins and all other cryptocurrencies like real money and handle them just as carefully. It cannot be stressed enough how important it is to secure all assets, including digital ones. The first level of security is offline storage. However, this piece of hardware (cold wallet) must also be securely stored. A desk drawer is definitely not suitable.

Where to Store Cryptocurrencies Securely?

Like many innovative companies in the blockchain universe enabling the transfer of previously analog processes into the digital world, Trisor GmbH operates at the intersection of asset security and digitalization. Specifically, data carriers, tokens, and other storage media are stored in Trisor's high-security safe deposit boxes with digital 24/7 access.

According to Trisor, blockchain technology is revolutionary and will change economic life far beyond cryptocurrencies. Music, real estate, and even video games can be tokenized, enabling decentralized value transfer while securing ownership rights. Consequently, the demand for secure storage of access data with quick access capability will increase. Trisor safe deposit boxes offer a secure solution.