Bitcoin wallet: what is safe?

 Your money is at stake! Bitcoin, Ethereum, XRP are probably the best-known cryptocurrencies in which many billions of dollars are stuck. But are they safely stored in the virtual accounts, the so-called "wallets", and cannot be stolen or simply disappear?

Smartphone with bitcoin currency and shield with bills

In this guide, you will find out what you should pay attention to when choosing your Bitcoin wallet.


The term wallet comes from English and simply means: purse. Like the ones, you carry around with you every day. In contrast, cryptocurrencies are stored in a virtual purse (the wallet). Alternatively, you can opt for a paper wallet, but more on that later. In order to assess the risk of the various wallets, we offer you an overview here. In the end, however, you have to decide for yourself. Which Bitcoin wallet is best for you depends entirely on your personal ideas and intentions.

    How does a Bitcoin wallet work?

    A Bitcoin wallet always consists of a private and a public key. The public key or your Bitcoin address is more or less your account number and looks something like this:

    3JC9k8ch3nVUijowk29z1WUaYCLxEbd1VZ

    A sender can use this address to transfer Bitcoins to your Bitcoin wallet.


    The private key consists of a list of 24 words and is assigned to each wallet by a random generator. It is, so to speak, the PIN for your account or the password for your wallet. This is exactly the point when it comes to Bitcoin wallet security.


    How secure are bitcoin wallets?

    In principle, a wallet can exist online and offline (for example in the form of so-called "paper wallets"). To purchase cryptocurrencies first, you need to use a coin exchange for your first transaction. Sites like Coinbase, Kraken, or Binance are online platforms on which you can convert Euros into Bitcoin and Co. To do this, you link your bank account to a wallet, which the respective provider generates for you. Of course, these providers are out to bind you as you charge fees for trading digital currency. To ensure that this also goes smoothly, each user receives a separate receiving address (an online wallet) for each cryptocurrency, which is linked to the account on the coin exchange. Trading orders can be carried out easily and sending, converting (e.g. exchange Ripple for Bitcoin), and exchanging the coins back into euros is possible in no time at all.

    However, security leaves a lot to be desired at some trading venues. News has surfaced several times that a stock exchange has been targeted by hackers. The South Korean stock exchange Youbit was hit very hard.


    The Youbit case

    The platform suffered two serious setbacks: the first took place in April 2017, then a second in December. In the first attack, a Bitcoin was worth around $ 1,000. Here the hackers obtained 4,000 Bitcoin worth around four million euros. In December, hackers again captured 17% of the entire volume of the exchange. Exact numbers of which Bitcoin wallet lost how much was never disclosed. At that time, Bitcoin had hit its high of almost $ 20,000. The coins of the customers who had deposited their wallets on the platform were then (estimated) reduced by a quarter. The Bitcoin price also collapsed by exactly a quarter afterward, to around $ 16,000. Youbit then filed for bankruptcy.



    So you see: If there are loopholes for hackers in a coin exchange, they can get to your wallet and thus to your coins. Therefore, you should only keep small amounts here, if at all, for trading and save larger amounts in another wallet. In addition, you hand over the control of your Bitcoin wallet to the corresponding exchange, which technically has full control over your wallet. Because the created wallets are managed by the exchange and so they also have access to your private key.



    The nice thing about the online wallets that are stored on exchanges like Coinbase is that it is very easy to trade Bitcoin. The really bad thing: Your private keys are also stored there. The fact that coin exchanges are not banks has advantages as well as disadvantages. A major disadvantage of the system is that there is no liability and no statutory deposit insurance (which is usually at least € 100,000). So you are dependent on the security precautions of your coin exchange. As a rule, the user does not find out whether and how they have an overview of all transactions at all times. A wallet is only as secure as its administrator - and you can simply be yourself.


    Hardware or software wallet?

    It's pretty simple: you need two Bitcoin wallets for every Bitcoin transaction. A receiver and a transmitter. You only need a coin exchange if you want to buy Bitcoin for the first time or convert it into euros. A hardware wallet, which can even consist of just a sheet of paper, is worthwhile for storage (more on this below). It is crucial with a hardware wallet that it guarantees a high level of security as long as you also have a backup. With a paper wallet, for example, you can copy several pages and store them in different places.

    WEB wallets:

    As the name suggests, web wallets are internet-based. As we have already seen, coin exchanges do offer wallets - which are irreplaceable for the first purchase of Bitcoin or another cryptocurrency - but you cannot ensure their security yourself and are completely dependent on the care of the platform operator.

    Mobile wallet:


    This is located as an app on your mobile phone and, like a customer or payback card, can be scanned using a QR code at the checkout and is useful for fast payment. The app is usually an online banking account at the same time. Safe as long as nobody hacks your password. And if the smartphone is lost, good advice is expensive without a backup.

    Desktop Wallet:


    A program that is installed on the PC and works similarly to a mobile wallet. As a rule, however, it has more functions. Each desktop wallet has its own address and new addresses can also be created.

    BUT: The wallets are not always secure on your own PC either - there is a lot of malware that tries, among other things, to steal the private keys. Security software that has special protection for common crypto wallets can help here.

    Seed and Public Key

    Each public key is linked to a private key, which first enables access to the blockchain and thus transactions. Since no banks are directly involved in trading cryptocurrencies, the security must be anchored within the blockchain in order to make every transaction traceable. The private key is often also called a seed. You can find this seed, for example, when installing a hardware wallet in the form of 24 words that you have to write down. It is a very extensive PIN that cannot be calculated based on current knowledge. Bitcoin uses cryptological hash functions to create the private key, including the SHA-256 algorithm, which was co-developed by the NSA.

    How secure are hardware wallets?


    Software wallets always use an operating system. That is of course vulnerable whenever it goes online. But you can also use a Bitcoin wallet, which never has to go online to receive Bitcoin. Such a hardware wallet, if used correctly and has a backup, is unhackable.
    If you want to be on the safe side, you can save your private key offline. There are numerous possibilities here. Combining two of the following methods provides a level of protection that is more than adequate in most cases.


    1. Save on a USB stick:

    For most people, this is probably the quickest method to implement. However, you should make sure that the USB stick is always stored separately from the PC and not left permanently connected to it.

    Disadvantages:

     Accidental deletion and data loss in the event of hardware damage or malware infection are still possible. It can also be infected by malicious software just like your computer.


     

    2. Printing on paper:

    If the private keys are printed out and stored securely, the level of protection is automatically increased. To do this, you create a paper wallet. Your key and address are safe here. The data is stored on a non-electronic medium and can therefore not be stolen or destroyed by malware infestation. Creating several copies and storing them in suitable locations is recommended and increases reliability.

    Disadvantage:

     Paper wallets are naturally prone to fire and water damage - you should consider this when storing.

    3. Engraving / embossing the private key in metal plates:

    The principle is the same as with the paper wallet, only that a medium is chosen that is resistant to most potential environmental influences.

    Disadvantage:

     If you don't have the option of engraving or embossing yourself, you would have to give your private key to someone else so that they can engrave the plate.

     

    4. Use a hardware wallet:

    These are devices that, for example, save the private key and only release it when the user connects it to the PC and presses a button. The devices are available for around 80 euros.

    Disadvantage:

     Not every cryptocurrency is supported by every device. Therefore, find out more before buying a device.

    Conclusion

    However, being offline as a whole has a small disadvantage: it may take longer before payments are actually completed. However, this disadvantage should be bearable in most cases if the alternative is the possible loss of the entire wallet through a hack.