Once you have local or online wallet set up and filled with some coins it is time to think about their safety. Cryptocurrency wallets are an attractive target for hackers, especially due to the fact that wallet addresses are anonymous. If funds are transferred to a thief’s address, they are not likely to be found again. There have been many cases of hacked wallets already. The once biggest Bitcoin exchange, Mt.Gox, claimed it was hacked and subsequently forced into bankruptcy. 650,000 Bitcoins (worth well over $400 million at current rates) are still missing. Also the popular Dogecoin repository Doge Vault faced a loss of about $50,000 after roughly 111 million Dogecoins were stolen. The services provided have been suspended since the hack was first reported. Local wallets can be hacked too, but large repositories are obviously preferred targets.
Due to the previous, it is not advised to keep coins in an online wallet. At the very least, holdings should be spread over various repositories. Large holdings should never be stored in an online wallet. It is possible to buy insurance for your assets, but this is very costly and unlikely to guarantee full liability.
The best way for keeping coins safe is by putting them in (deep) cold storage. This means coins are kept somewhere offline. In the case of deep cold storage, retrieving them again is made significantly more difficult. Operators of online wallets typically follow a best practice by keeping the majority of the coin reserves in cold storage. The amounts on their servers will only cover anticipated withdrawals. This is why diversification over online wallets should provide some level of safety. Given that the best practices are followed (which is hard to check) it should always be possible to retrieve a significant part of the coins. Needless to say, this is far from optimal security and procedures to retrieve coins can be tedious. It is possible to put your own coins in cold storage through one of the following methods:
- External storage devices (eg. USB drive)
- Paper wallets
- Physical items
- Hardware wallets
- Online wallets, but with the encryption key kept offline
Each of these methods can be effective for keepings coins safe, as long as relevant recommendations are followed. Given the importance and extend of the details, these will be covered separately. Reading into this and setting the cold storage up correctly requires some effort, but given the risks of relying on a third party this investment is bound to earn itself back.