U.S. News and World Report

As eager investors jump into cryptocurrencies to participate in wealth creation or avoid missed opportunities, it is crucial to understand how to protect their digital assets.

Bitcoin and other cryptocurrencies exist on the blockchain, which is a digital transaction ledger. Cryptocurrencies are decentralized digital currencies, which means they do not have a central authority, such as a bank that can monitor transactions. Instead, they operate on a peer-to-peer exchange network, where transactions are verified by members (also called miners) in a decentralized network. Although the blockchain has a reputation for security, the blockchain is not without loopholes.

For example, the decentralized financial application Badger DAO was hacked and users lost US$120 million worth of funds from its platform. This encryption hacking was the result of a phishing incident, which led to the destruction of the front end of the platform, leading to malicious transactions.

Novice crypto investors who are still learning the best practices for managing digital assets need to understand that they are responsible for managing the threat of crypto hackers. Actions that crypto investors can take include choosing the crypto exchange that best suits their investment or trading needs, choosing an encrypted wallet that can properly protect digital assets, and taking security measures when interacting with the exchange.

Solving these many considerations can be a daunting task, but to become a successful and safe cryptocurrency investor, you need to understand the following key things:

— Will the blockchain be hacked?

— How to store encryption securely.

— Tips to prevent theft of cryptocurrency.

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Can the blockchain be hacked?

Although the blockchain design has inherent security features, it is vulnerable to attacks, and cryptocurrency exchanges have also been hacked before.

Here is what you need to know: Cryptocurrency and blockchain work together. Blockchain is a technology that allows digital assets such as Bitcoin to operate, so this technology is the basis for the success of cryptocurrency. Blockchain is a digital blockchain that carries information. The blockchain network protects financial transactions.

Once this data is recorded on the blockchain, it is almost impossible to change it. When a transaction occurs, a new block is created. A series of blocks creates a chain. If a miner tries to tamper with a block, the chain will fail. Since the blockchain is a distributed ledger without a central authority, this reduces the possibility of data being tampered with. Nevertheless, cryptocurrency exchanges have been hacked before.

In the Badger DAO hacker, when a user interacts with an application, such as moving funds, the hacker is able to control the approval of transactions, use the network and drain the user's account.

Users can protect themselves from blockchain hacker attacks by properly protecting their cryptocurrency. The first is to store their digital assets securely in an encrypted wallet.

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How to store cryptocurrency safely

Since it may not be safe to store all cryptocurrencies on a third-party exchange, it is best to use a cryptocurrency wallet to manage digital assets.

Wallets are software that creates and stores public and private keys. These keys are used to access digital currencies stored in encrypted wallets. These keys are essential because if you lose them, you may not be able to access your digital assets.

When explaining private and public keys, Chris Kline, chief operating officer of Bitcoin IRA, likened them to emails and their passwords. "You give your email address to people so they can send you emails-the public key is your encrypted email address. If you want to send bitcoins to someone, please share you with them The public key. The private key is your email password."

Encrypting users are responsible for ensuring the security of their private key passwords.

You must write it down and keep it in a safe place, because if you lose or forget it, it may pose a challenge to access your encrypted funds.

Cold wallet and hot wallet

Crypto investors who do not like to use wallets can use services such as Coinbase Global Inc. (stock code: COIN), PayPal Holdings Inc. (PYPL) or Venmo, which integrate services called hot wallets.

JP Richardson, founder of the crypto wallet company Exodus, said: "(With) a custody platform like Coinbase, you delegate the ownership of the asset to Coinbase." In this case, you cannot control the security of the digital asset.

Hot wallets are online wallets that allow users to quickly transfer or trade encrypted assets. However, since they are connected to the Internet, hot wallets may be vulnerable to cyber attacks or hacker attacks, which can lead to the loss of your cryptocurrency. For example, if you open an account at a cryptocurrency exchange and deposit funds into that account, this is regarded as storing your digital assets in a hot wallet.

On the other hand, the cold wallet is not connected to the Internet. They provide greater security and are considered a less risky way of storing cryptocurrency.

Cold storage requires users to have a hardware device similar to a USB drive and a password to enter the wallet. If you want to transfer assets from your cold account, you must transfer them from the cold wallet to the hot wallet in order to trade with cryptocurrencies. This may seem inconvenient, but unless someone else has access to your cold wallet’s PINS or password, cold storage is less susceptible to hacker attacks.

To avoid frequently switching back and forth between a cold wallet and a hot wallet, the standard practice is to store a certain amount of cryptocurrency in an exchange for easy trading, but store most of the cryptocurrency funds safely in a cold storage. Therefore, it makes sense to have multiple crypto wallets: a hot wallet to access the crypto market and easy transactions, and a cold wallet to maximize security.

If you don't want to deal with storage and security issues, but want to invest in cryptocurrencies, you can choose Bitcoin exchange-traded funds. Tally Greenberg, head of business development at crypto hosting provider Allnodes, said this may be the safest way to enter the crypto space. In the United States, there are only two direct investment crypto ETFs so far: Proshares Bitcoin Strategy ETF (BITO), the first ETF linked to Bitcoin, and VanEck Bitcoin Strategy ETF (XBTF). These Bitcoin ETFs are traded in Bitcoin futures contracts. This option addresses concerns about wallet management, asset liquidity and security.

Tips to prevent cryptocurrency theft

One of the risks of managing digital investments in custodial accounts or hot wallets is potential hacking. If the platform is down, users can no longer perform encrypted transactions or log in to withdraw money, which may bring great risks

On the other hand, the risk when using a self-hosted account or cold wallet is to protect your password. Usually, investors keep this written code in a safe. Experts say that with more innovations in the encryption space and the development of storage technology, there will be easier self-custodial storage solutions.

"We will use the power of iCloud or Google Cloud to help consumers store this information safely, but today, you still have to write it down," Richardson said.

When searching for exchanges that trade cryptocurrencies, there are some key functions to ensure that assets are stored on a secure platform. "The biggest concern is, where are you trading?" Greenberg said..

First, Greenberg said, investors must check the exchange’s comments to understand the size of the exchange, the number of traders, the assets being traded, and the assets they want to enter.

Kline said to look for authentication options and built-in security parameters. He said that when you create an account, make sure it has two-factor authentication. This is a security feature that verifies that you, not an imposter, are trying to access your account. SMS codes or text messages are the most commonly used verification methods. But depending on the account, it may provide additional security features.

Experts say that reputation is one of the biggest factors. "If it is a well-known and prestigious platform, you usually can't go wrong, and today's largest platform will be a company like Coinbase," Richardson said. For companies that may have security issues in the past but claim to have corrected them, this may be a red flag that requires additional research.

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How to protect your encrypted investment from hacker attacks originally appeared on usnews.com

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