The risks of cryptocurrency wallets

Cryptocurrency continues to dominate headlines; and it’s no longer just focused on Bitcoin. Speculators are now flinging their money into hundreds of newer cryptocurrencies, such as Ripple, Litecoin and Doge.

These so-called “altcoins” are risky enough, because their prices (at time of writing) are highly inflated. But the risks don’t stop there. Storing your newly acquired cryptocurrency isn’t a straight forward process and is potentially insecure.

When you buy cryptocurrency, your first option is to leave the coins in the exchange you bought them from – local examples include Cryptopia and Dasset. But this isn’t recommended, since exchanges are as yet unregulated and there’s always a risk they’ll be hacked.

Unlike with banks, there’s no insurance or legal recompense if your money is stolen from a cryptocurrency exchange.

So where should you move your digital currency to? The answer is a cryptocurrency wallet. But here’s where things gets complicated, because there are several kinds.

Firstly, let’s get a grip on the basics. The way all cryptocurrency wallets work is that you have a “public key” to receive money, and a “private key” to send it. The latter is the most important to safeguard, because if someone discovers your private key then they can steal all of your money.

The simplest type of wallet to use is a digital one – usually an app, but there are also online versions. A few of the popular apps are Jaxx, Bread and Mycelium. Some digital wallets only hold Bitcoin, but others (such as Jaxx) can hold multiple types of cryptocurrency.

Digital wallet apps will manage your public and private keys for you. But because this data resides on your computer and/or smartphone, there’s still a risk that someone might hack into your funds.

Indeed, last week a serious vulnerability was discovered in a popular digital wallet called Electrum. According to a post on the Bitcoin Forum, linked to from the Electrum home page, the vulnerability “potentially allows random websites to steal your wallet via JavaScript.” While the company promptly patched it up, unfortunately this perfectly illustrates the security concerns around cryptocurrency wallets.

Outside of software issues, which you’re reliant on the developers to control, there are steps you can take to better protect your digital wallet. One is to encrypt your sensitive data and store in at least two secure places. Even better if one of those places is offline.

If you’re a serious cryptocurrency investor, or if you’re simply paranoid about keeping your money in a digital wallet, a hardware wallet is generally viewed as a more secure option. As the name suggests, this is a device that connects to your computer but otherwise remains offline.

One of the better known hardware wallets is the Ledger Nano S. It looks just like a USB stick, except it has a small display for entering your pass codes.

Local exchange Bitprime is anĀ authorized seller of the Ledger Nano S in New Zealand. It only sells the device to its verified customers, at a cost of $140. However the company is struggling to keep up with demand, citing “a global shortage and the high cost of providing tech support.” The Ledger Nano S is currently listed as out of stock by Bitprime, while on the official Ledger website the waitlist is at least a couple of months.

The other popular hardware wallet on the market is Trezor, which claims to have “trimmed away everything that could be hacked.” This device looks more like a small blood glucose monitor. The Trezor is more expensive than the Ledger, at EUR 115 (NZ$190) including delivery. But unlike the Ledger, you can get one right now.

Lastly there is something called a “paper wallet,” which is completely offline, non-digital and has no hardware. That’s because…well, it’s a piece of paper. This method is often viewed as the safest option, because it can’t be hacked into.

A paper wallet is created with a software program that randomly generates a public and a private key. You then write down or print out those details, and store them somewhere safe.

Despite the simplicity of this method, some of cryptocurrency’s biggest traders use paper wallets.

Among the most successful are the Winklevoss twins, who you may remember as the nemeses of Mark Zuckerberg in the movie The Social Network. Well, now they’re Bitcoin billionaires.

A recent New York Times profile described how the twins store their cryptocurrency. They “cut up printouts of their private keys into pieces” and then distribute them “in envelopes to safe deposit boxes around the country, so if one envelope were stolen the thief would not have the entire key.”

While you don’t need to go to those lengths to protect your money, you do need to be aware of the risks. Remember that cryptocurrency wallets are much less safer than bank accounts. To quote the old TV show Hill Street Blues, let’s be careful out there.