You know the different ways to store your coins, but what are you keeping them safe from? There are several threats to your digital money, and being aware of them will help you avoid them as much as you possibly can.
You are probably the greatest threat to your own coins. This may sound strange, but it’s true, there are many horror stories online of people making mistakes and having lost their Bitcoin. There are two primary mistakes that Bitcoin users make. One is to encrypt a Bitcoin wallet, then forget the password. The second is hard drive damage or other technical error that causes the loss of the private key.
Some of the standalone Bitcoin clients allow you to encrypt your wallet, so that if someone gains access to your computer they cannot get your coins. However, people sometimes set up this encryption, then forget about it—until they want to spend their coins. Then they need the password—oops! They can’t remember. And if this happens to you, you’re sunk; there is no way to recover those coins. I recommend that if you think encryption is necessary, you write down your password and keep it in a safe place. This is obviously true for an online wallet as well, since you need a password to log in.
Since many users store their coins on a local drive, another problem is hard drive failures leading to lost coins. This is a shame, since it is so easily avoidable: all you need to do it create a copy of the wallet file and store it on a USB drive or an online storage system, such as Google Drive or Dropbox. If you do have a backup (you should), I recommend encrypting that copy—just write down the password first!
2. Physical Theft: Roommates and “Friends”
While this is far from the most dangerous threat most Bitcoiners will face, coins can be stolen just like cash. If you have a paper wallet, or a mobile wallet, or a client on a laptop, a thief could simply walk off with your coins. If they know how to use Bitcoin, and they get access to your wallet, they could transfer your coins to another address they own.
This doesn’t seem to happen all too frequently, but when I do hear about it, typically it occurs in college dorms or other settings where people have tech savvy acquaintances. If this concerns you, just keep your wallet encrypted and keep a close eye on it.
3. Active Attacks: Hacking
There are a few tech-savvy criminals out there who try to steal as many Bitcoin as they can. They typically target exchanges or online wallets were there are lots of users, so individual users typically aren’t at risk unless they have coins stored online.
Several exchanges have been hacked in the past few years, leading to various amounts of lost coins. As the Bitcoin community grows, and as the infrastructure grows, it is likely that these types of attacks will become mitigated once bigger companies implement more rigorously tested safety measures. For now, the best approach is to store only small amounts in the exchanges or online wallets.
4. Passive Attacks: Malware
These are likely an even greater threat than active attacks to the average Bitcoin user, since they target the individual computer that might hold the coins. A passive attack is accomplished with malicious software meant to compromise your computer. These can include things like keyloggers, which record all of your keystrokes and send them to the attacker. Keyloggers are commonly used to obtain passwords, and if an attacker has your passwords they have your Bitcoin.
Alternatively, the malware might be a piece of software that searches your computer for a wallet file, and if it finds one, it sends that file (or just the private keys) along to the attacker.
This type of attack can even come from a browser; if you allow a bad script to run it can wreak havoc, especially with online wallets. This malware is unfortunately all too easy to contract, especially if you don’t have good protection against it and are unsafe in your web browsing.
1. Yourself
You are probably the greatest threat to your own coins. This may sound strange, but it’s true, there are many horror stories online of people making mistakes and having lost their Bitcoin. There are two primary mistakes that Bitcoin users make. One is to encrypt a Bitcoin wallet, then forget the password. The second is hard drive damage or other technical error that causes the loss of the private key.
Some of the standalone Bitcoin clients allow you to encrypt your wallet, so that if someone gains access to your computer they cannot get your coins. However, people sometimes set up this encryption, then forget about it—until they want to spend their coins. Then they need the password—oops! They can’t remember. And if this happens to you, you’re sunk; there is no way to recover those coins. I recommend that if you think encryption is necessary, you write down your password and keep it in a safe place. This is obviously true for an online wallet as well, since you need a password to log in.
Since many users store their coins on a local drive, another problem is hard drive failures leading to lost coins. This is a shame, since it is so easily avoidable: all you need to do it create a copy of the wallet file and store it on a USB drive or an online storage system, such as Google Drive or Dropbox. If you do have a backup (you should), I recommend encrypting that copy—just write down the password first!
2. Physical Theft: Roommates and “Friends”
While this is far from the most dangerous threat most Bitcoiners will face, coins can be stolen just like cash. If you have a paper wallet, or a mobile wallet, or a client on a laptop, a thief could simply walk off with your coins. If they know how to use Bitcoin, and they get access to your wallet, they could transfer your coins to another address they own.
This doesn’t seem to happen all too frequently, but when I do hear about it, typically it occurs in college dorms or other settings where people have tech savvy acquaintances. If this concerns you, just keep your wallet encrypted and keep a close eye on it.
3. Active Attacks: Hacking
There are a few tech-savvy criminals out there who try to steal as many Bitcoin as they can. They typically target exchanges or online wallets were there are lots of users, so individual users typically aren’t at risk unless they have coins stored online.
Several exchanges have been hacked in the past few years, leading to various amounts of lost coins. As the Bitcoin community grows, and as the infrastructure grows, it is likely that these types of attacks will become mitigated once bigger companies implement more rigorously tested safety measures. For now, the best approach is to store only small amounts in the exchanges or online wallets.
4. Passive Attacks: Malware
These are likely an even greater threat than active attacks to the average Bitcoin user, since they target the individual computer that might hold the coins. A passive attack is accomplished with malicious software meant to compromise your computer. These can include things like keyloggers, which record all of your keystrokes and send them to the attacker. Keyloggers are commonly used to obtain passwords, and if an attacker has your passwords they have your Bitcoin.
Alternatively, the malware might be a piece of software that searches your computer for a wallet file, and if it finds one, it sends that file (or just the private keys) along to the attacker.
This type of attack can even come from a browser; if you allow a bad script to run it can wreak havoc, especially with online wallets. This malware is unfortunately all too easy to contract, especially if you don’t have good protection against it and are unsafe in your web browsing.
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