How to Keep Your Cryptocurrency Safe
Safety is a critical aspect of cryptocurrency custody. Learn how to keep your crypto assets in your hands and away from hackers.
The cryptocurrency world can seem intimidating from the outside looking in. With headlines about exploits, exchanges going bankrupt while halting withdrawals, and hackers stealing crypto from users, it’s understandable to be hesitant about the space.
Those issues don’t even involve the volatile nature of the market itself. In a lot of ways, the crypto world is the wild west, and mistakes or misfortunes are often without remedy. However, there’s a few ways to keep your crypto as safe as possible.
Dollar Cost Averaging
This isn’t as much about “security” in the same way preventing a hack is “security,” but it’s important to address as a matter of crypto-financial security. Crypto is famous for being a volatile market, with violent, 10-30% swings on a week to week basis. This alone prevents many from putting their money into cryptocurrency, but, there IS a safe way to put money into the market. Dollar-Cost averaging is a common method of investing in any asset.
You choose an amount to invest and an investment schedule. You then set this schedule and forget about it. This is a very widely endorsed way to invest in cryptocurrency. Instead of buying a whole Bitcoin for $40,000, and watching it sink to $25,000, it’s safer to slice up that $40,000 over time.
Instead, you could invest $500 every Monday until you own your desired amount of bitcoin. By doing this, you become much less vulnerable to market volatility, with your weekly investments balancing out the ups-and-downs in the market.
While this isn’t going to be as profitable as being lucky and buying a whole bitcoin, and the price doubling the next month, it’s markedly safer. You ride the waves rather than jump into the ocean without a life vest. The best part is that you can go at your own pace. Whether you want to put in $1,000 a week or $5 a week, most exchanges offer a recurring investment schedule feature so you can enter the market at a pace you are comfortable with.
There is a saying in crypto: “not your keys, not your crypto” that you should take to heart. One of the major benefits of cryptocurrency is self-custody ownership of money. While in the US there is less concern of this, around the world oppressive banks and regimes can, and do, disallow citizens from accessing their rightly owned money.
Chinese banks have recently frozen withdrawals of some citizens, and an economic crash can see this happen anywhere. In 1929 this happened in the US with the market crash and subsequent bank run that followed.
Self-Custody wallets are the bread and butter of protecting your crypto. Presuming you have safely stored your private keys, and NEVER share them with anyone, it is immensely difficult for a hacker to steal funds from your crypto wallet.
Self-Custody wallets can be connected to the internet (hot wallets) or held offline (cold wallets). While there are pros and cons to each type, cold wallets are the clear answer in terms of maximizing security.
DeFi is still new, and hackers frequently exploit DeFi protocols. If you want to use DeFi, make sure it’s a very small amount of your crypto to prevent large losses in unpredictable events. While DeFi is one of the fastest growing and lucrative sectors of crypto, its infancy is shown through security vulnerabilities across the ecosystem.
DeFi generally relies on smart contracts to operate. While smart contracts are built on blockchain networks, they themselves lack the airtight security of a blockchain network, and hackers have been able to find problems with the code that they can exploit.
When they exploit a DeFi protocol, they often steal millions of dollars. Law enforcement has gotten better at tracking these major hacks and sometimes funds are returned to users, but it’s far from a safety net to rely on law enforcement. Strong due diligence is necessary in this space.
The Golden Rule: Spread the Risk
In a similar way to Dollar-Cost Averaging, the absolute best and most important method of keeping your crypto safe is by spreading the risk. This means in terms of your portfolio, and in terms of general security. Having multiple wallets (both hot and cold), multiple exchange accounts, using multiple DeFi protocols instead of only one, and multiple layers of security protecting your private keys is the best way to remain safe in cryptocurrency.
A great example of hardcore crypto security is a family who got wildly rich on bitcoin. A dad sold all the family’s assets (including the house) for bitcoin in around 2015. In a true testament of love his wife stood by this decision, and now the family has likely over 100 million dollars owing to this risky gamble. If you had $100 million dollars in bitcoin, how would you protect it?
The family has hidden pieces of their private keys placed across multiple continents. So, if someone wants to steal the family wealth, they are quite literally going to have to embark on an Indiana Jones style journey.
Hopefully we all get to this level of wealth, but for now, this is just a fun anecdote to paint a picture of the depths people will go to protect their crypto. The moral of the story is: there’s no such thing as being too secure, spreading the risk can be as extreme as spreading it on different continents. For the more general crypto user, a healthy mix of centralized exchanges with small amounts on them, hot wallets, and cold wallets is the best practice with cryptocurrency.
You might be thinking “this seems pretty onerous”, but it’s also important to establish a timeline to accomplish this. No need to purchase a cold wallet, download three different hardware wallets, and sign up for five exchanges if you have less than $1,000 in cryptocurrency. As years go on, you might suddenly find your $1,000 to be worth $10,000. Or maybe you do even better, and your continued investments become $100,000 or more over a few years.
You’ll likely find yourself naturally spreading the risk because if you get to that point, it probably means you are already smart about security. The goal is to require some extra security steps to protect yourself, but as time goes on and your investment grows, this will naturally become a priority.
*A Common threshold is $1,000 is when a cold wallet becomes a smart purchase*
- Security in Crypto means multiple things from smart investing to smart security practices
- The more money you have in crypto, the greater the need to prioritize security
- Spreading the risk is one of the best ways to protect yourself. If something goes wrong, you only lose a small part of what you own
- If they are not your keys, it is not your crypto!
Who is Cindicator?
Cindicator is a world-wide team of individuals with expertise in math, data science, quant trading, and finances, working together with one collective mind. Founded in 2015, Cindicator builds predictive analytics by merging collective intelligence and machine learning models. Stoic AI is the company’s flagship product that offers automated trading strategies for cryptocurrency investors. Join us on Telegram or Twitter to stay in touch.
Information in the article does not, nor does it purport to, constitute any form of professional investment advice, recommendation, or independent analysis.