Cryptocurrency Hacks – How to Protect Yourself When Trading And Investing

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If you follow crypto markets, you are probably aware of this weekend’s massive theft of digital currency from a Japan-based exchange. In the early hours of Friday January 26th Coincheck Inc. was hacked and nearly $500 million in NEM digital tokens were stolen. Mercifully, Coincheck seem to have the means to reimburse their customers, albeit after a slight haircut, but once again security is a hot topic when it comes to crypto trading and investing.

So how can you protect yourself and still participate in the cryptocurrency phenomenon? Here are a few things to consider:

Are you trading or investing? – first off be clear on what your strategy is. Are you actively trading, or buying and holding?

Traders – If you are trading crypto then you will be using an exchange and, as we have seen, exchanges can be vulnerable to hacks. That is a risk you will have to take, but at least exercise caution. If you are in Japan, for example, make sure you are using an exchange that is registered with the Financial Services Agency. The site is in Japanese but you can find a list here. (I couldn’t find the same page on their English site) Note though that Coincheck had applied to register and was allowed to continue trading, and advertising on TV, during the approval process. FSA registration does not guarantee that your funds are safe, but I would not bother with exchanges that don’t make this list. If you are trading outside Japan Buy Bitcoin Worldwide is a useful resource for finding exchanges in your country, along with a list of pros and cons for each exchange.

You should be looking for exchanges that implement at least the following measures:

  • Cold wallet – the recent hack was from Coincheck’s hot wallet, which is connected to external networks
  • Whitelisting of all withdrawal addresses for crypto
  • Private server
  • Two-factor authentication
  • No API withdrawals

If you are done with trading, or taking a break for a while, you should be moving your coins off the exchange to a private wallet or storage device.

Investors – perhaps you just want to buy some Bitcoin or Ethereum and hold it for the long term? In this case you will likely buy the coins on an exchange, but you then need to move them into a private wallet. If you leave crypto sitting on the exchange you are at risk.

Online wallets are convenient for shopping with Bitcoin but they are also not a safe place to store your coins.

I stored Bitcoin with Xapo, whose vault service is currently free of charge. They store their private keys in multi-signature form in vaults in Asia, the United States and South America.

Hardcore crypto enthusiasts will tell you to keep your private keys completely offline. Probably the most popular hardware wallet is the Trezor device. With this device a pin code gives you access to your coins, and if you lose it you can regenerate your wallet using the 24 word recovery code.

If you don’t trust any storage solution that can be plugged into a computer, or are looking for a near indestructible back up for your hardware wallet then take a look at Cryptosteel.

Lastly, don’t get carried away with the promise of high returns. Only invest / trade amounts commensurate with your level of knowledge. If a large portion of your assets are in cryptocurrency you better be an expert!

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.

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