Cryptography, the art of encrypting information, has traditionally been one of the most popular ways to convey sensitive information. In the cryptocurrency space, cryptography is used to not only send encrypted data but also provides enhanced security to the cryptocurrencies.
Despite this, there exist loopholes making cryptocurrency owners lose their digital assets.
What is Cryptography?
Cryptography is the process of encrypting a message in such a way that only the recipient of the message can decode it. Cryptography consists of two main components:
- Hashing: used to validate the integrity of information, encrypt account addresses and generate the complex algorithms that must be solved to mine bitcoins.
- Digital Signature: digital signatures prove the authenticity of a message.
Many blockchain-based cryptocurrency networks use hashing and digital signatures to keep coins safe. Also, the networks assure of coin security in the following ways:
- Decentralised: Cryptocurrencies rely on the decentralized nature of blockchains for security. The blockchain is secured by a network of computers that validate transactions and prevent hacking. Hacking a blockchain is made difficult by the fact that a hacker would have to hack a majority of all computers in a blockchain to gain access.
- Coins are secured in a wallet: Cryptocurrencies are digital assets. Unlike fiat money or gold, they can’t be touched. However, they can be secured in the same cryptographic language used to code the blockchain technology. To prove ownership of coins and to help complete payments, cryptocurrency wallets provide two types of keys: a public key and a private key.Both of these keys are numbers, but they are encrypted to include letters for security reasons. The public key proves that you own your cryptocurrencies. It also helps you receive cryptocurrencies from other users. The private key, on the other hand, is supposed to remain private. It’s used when you need to withdraw your coins.Another item used to identify you is the address. An address is derived from your private key. In most cases, an address is generated on a transaction to transaction basis. An address can also be used to send bitcoins to you. Because a new address is generated for every transaction, your cryptocurrencies are always safe.
So, what makes People Lose their Cryptocurrencies?
1: Cryptocurrency Wallets
A cryptocurrency is a digital hardware device, a mobile application or a piece of paper that secures your coins. A wallet holds the public and private key needed to help you make payments, receive coins or withdraw them into real cash.
They also generate the unique addresses that help you receive payments in a safe and pseudo-anonymous way. Some wallets are designed to hold specific types of cryptocurrencies. Electrum, for example, is a desktop wallet that holds bitcoins only.
What do you need for litecoin? Most altcoins (all cryptocurrencies beside bitcoin) are stored in specific wallets as well. The popular mobile wallet, Coinomi, for example, stores about 40 different altcoins.
How People lose coins in wallets
- An online based wallet gets hacked, and hackers steal all the cryptocurrencies stored in there.
- A mobile wallet gets attacked by bugs that affect the wallet’s security system.
- You lose your wallet’s password plus the backup seed needed to help you recover your coins.
- You lose your paper wallet.
- You store your coins in a cryptocurrency exchange that is vulnerable to hacking.
2: Flaws in Cryptocurrency Exchanges’ Security System
A large number of cryptocurrency owners visit exchanges on a daily basis to trade coins. Some people also store their coins on the wallets provided by exchanges. Unfortunately, exchanges don’t have the best security systems.
Since 2014 when Mt. Gox, a Tokyo based exchange was hacked, there have been more than a dozen exchanges hacked. In most cases, cryptocurrencies lost on exchanges are never recovered. To avoid becoming a victim:
- Secure your coins in a hard wallet like the Ledger Nano S.
- Limit the number of coins you hold on exchanges for trading purposes
3: Sending Payments to the wrong addresses
One feature of cryptocurrency payments is that they are irreversible. Missing one character of an address means that you either send coins to the wrong person or a non-existent address. Either way, such a transaction cannot be reversed.
Some cryptocurrencies like Ethereum are, however, making efforts to ensure that ether coin users can never send coins to a non-existent wallet address.
4: Revealing your Private keys
Anyone who knows your private key can steal your coins. A private key is the long list of characters that help you withdraw cryptocurrencies from a wallet. If someone knows this key, he or she can use it to transfer all of your coins to his wallet.
Keeping your QR code public can also increase your chances of losing coins. The QR code provided by your wallet holds important data that can increase the chances of losing your coins. Always keep your private key secure.
Tips to Secure any Cryptocurrency
The blockchain in itself is a secure platform. However, that does not mean you cannot lose your hard-earned cryptocurrencies. These tips can help you ensure you never lose your coins irrespective of any incident.
- Store your coins in a respected hard wallet- hard wallets in the form of a flash drive are the best places to secure digital assets. These wallets allow you to back up your coins. They have state of the art security and work offline, free of hacking vulnerabilities.
- Use 2-factor authentication when accessing exchanges- to avoiding losing your exchange passwords to a hacker, use a 2-factor authenticator to access the platform. This system involves the use of a password and a code sent to your mobile device or email address to unlock access to your account.
- Write your passwords and passphrases and store them in a secure place.
- Avoid holding coins in online wallets- only hold minimum coins in an online wallet you have to. This way you avoid losing plenty of your funds in the case of a hacking incident or a bug affecting the wallet.
- Don’t leave your coins in an exchange unless it’s necessary- always transfer your coins to a personal wallet after trading.
If you can follow the tips advised above, you have a better chance securing your cryptocurrencies. Hackers mostly target exchanges with weak securities systems and crypto owners who expose their passwords and addresses. Store your coins in secure hard wallets and set up back up in case you lost the device.
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