Bitcoin was the first viable cryptocurrency, and it remains the most popular alternative to fiat currencies to this day. Investing in bitcoin comes with its risks, just like an investment, but those who are new to the game should note that some of these risks are actually user errors and, as such, they’re completely avoidable.
The majority of bitcoin thefts and scams occur on exchanges, not while investors have their crypto assets in storage, but that doesn’t mean stored bitcoin is always 100% safe. There are still ways that careless investors can wind up losing their hard-earned assets if they aren’t careful. Read on to find out about three common bitcoin storage mistakes to learn how to avoid them.
Mistake #1: Not Verifying Exchange Identity
American cryptocurrency exchanges like xCoins are required by the Patriot Act of 2001 to request customer verifications. Many exchanges still allow users to deposit funds and begin trading before completing the verification process, which can seem appealing for those who want to maintain anonymity. Failing to verify identity is a serious mistake for those who want access to their crypto assets, though.
Although it’s legal to deposit funds and trade on exchanges using anonymous accounts, it is not possible for customers to withdraw funds until after they have verified their identities. The reasoning behind this is sound. Banks and exchanges are required to request verification as a means of preventing fraud, which actually protects exchange users and their assets. If customers can’t complete the necessary steps to complete the verification process in a timely manner, though, it can be inconvenient at best and quite costly at worst.
Whether they want to store their bitcoin in their exchange wallets or move it to cold wallets for improved security, investors should always verify their identities as soon as they sign up for accounts. That way, there will be no risk of losing hard-earned crypto assets due to the inability to comply with the platform’s verification procedures.
Mistake #2: Failing to Back Up Wallet Keys
Cold storage, which uses offline bitcoin wallets instead of the hot wallets provided by most exchanges, is generally considered the safest way to protect crypto investments. Doing so is not without risks, though.
Since bitcoin is a decentralized currency that does not operate through banks, investors are responsible for keeping their own private wallet keys safe. There is no option to reset a password, as with online banking. That means not just keeping others from accessing them, but also ensuring that they won’t be lost forever if something goes wrong with the laptop or desktop on which the wallet keys are stored.
The best way to avoid this mistake is to keep a physical backup of each private key and store it someplace safe. Some investors rent safe deposit boxes, while others purchase home safes rated to protect valuables from fire and water damage. Either solution is fine. Just make sure to keep a backup someplace secure in case the computer where the keys are stored is damaged or stolen. Otherwise, all that bitcoin will be lost forever if something goes wrong.
Mistake #3: Falling for Bitcoin Wallet Scams
Scammers are certainly not exclusive to the world of cryptocurrency, but bitcoin scams are pretty common, and they cost investors collectively around $9 million per year. The general rule when it comes to avoiding any scam is that if something sounds too good to be true, it probably is. That doesn’t mean it’s not worthwhile for investors to take the time to familiarize themselves with common scams, though.
Most crypto scams revolve around false exchanges or promises of unreasonably high returns on investments. However, some scammers target hardware wallets instead.
As a general rule, legitimate hardware wallets are one of the safest forms of crypto storage. This has led many consumers to switch to store most or all of their bitcoin offline on keychain USB drives. Unfortunately, not all hardware wallets are created equal, and some have built-in vulnerabilities that make them easy targets for hackers.
One recent scam takes this problem a step further. It involves specifically manufacturing hardware wallets with pre-configured, compromised seed phrases hidden under scratch cards. The investor purchases the hardware wallet scratches the card, then set up the wallet with the compromised seed, creating a backdoor for hackers.
The best way to avoid hardware wallet scams is to buy hardware only from trusted, reputable suppliers. Never open unsolicited emails regarding hardware wallet sales or buy them for unrealistically low prices online. Chances are, the seller has either been duped or is actively working with disreputable hackers intent on stealing users’ hard-earned crypto assets.
Bonus Tip: Only Use Reputable Exchanges
While this article has focused on common storage mistakes, most scams and security breaches actually occur on cryptocurrency exchanges. Many countries are placing stricter regulations on crypto exchanges now than they were in the infancy of decentralized currency, but that doesn’t stop scammers and hackers from attempting to defraud investors or steal their assets.
To avoid scams, investors need to research each exchange platform. They should check not just the company’s website, which could contain inaccurate or intentionally misleading information, but also third-party review sites and forums. It’s also wise to read up on recent examples of clever crypto trading scams to learn what red flags to look out for.
The Bottom Line
Many experts and analysts believe that cryptocurrency, in general, and bitcoin, in particular, represent the future of currency and payments. Though various governments and regulatory agencies have required exchange platforms to implement safeguards to protect consumers, the very nature of bitcoin is such that investors still need to take responsibility for protecting their own assets, especially while in storage.
Don’t assume that just because the bitcoins are stored away in any old wallet, they’ll be safe. Instead, purchase a hardware wallet for cold storage from a reputable supplier and store only as much cryptocurrency as is needed for an exchange in hot wallets. Back up the private wallet keys, and take all appropriate precautions when using new exchange platforms.