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How to Protect your Bitcoin

Cryptocurrency has been a very hot topic in the news, especially in the last few months. This is due to the fact that these “currencies” have drastically gone up in value, especially in the last six months.  Bitcoin, the digital currency based on blockchain technology, has made a huge increase beginning after July last year with 1 Bitcoin being valued over $20,000 in December. Even though it is now starting to drop drastically – as of this writing it has lost almost 50 % of its value and is currently being traded around $11,500 – it is worth a lot of money. Compared to 2017 it has gone up by 1342 %, a raise that you will definitely not see in the normally in Wall Street or other stock exchanges.  For example, people who bought bitcoins on April, 4th in 2011 have become millionaires.

It’s the reason why many people have recently been trying to find and recover their bitcoins.  However, the Deputy Head of Technology of the London-based British newspaper The Telegraph stated two years ago that many bitcoins from the total amount that were mined until that year were already lost. According to an estimation of NVDIA engineer John Ratcliff, almost 30% of all bitcoins created from the introduction of bitcoin in 2009 until 2014 were so-called “Zombie coins.”  These coins he is referring to are bitcoins that have not been used for at least 1.5 years. If you take that estimate in regards to the 13.7 million bitcoins that were unlocked until the middle of 2014, a total of 4.11 million bitcoins were not used. The guess is that a lot of these unused bitcoins are gone for good.

There are many stories about people who remember that they had bitcoins but lost their storage media. One person from Newport, South Wales wanted to pay the city to find his discarded hard drive with his private key of 7,500 bitcoins in a waste recycling center. And yet another person who mined 10 bitcoins in 2010, put their bitcoins on an USB stick and forgot about it. When they found out that price had gone up, they were not able to find the stick anymore. And the list goes on and on and on…

 With so many bitcoins probably vanished or lost – How should you protect your digital coins?

First, make sure that your bitcoins are stored somewhere safe, away from potential hackers and thieves.

There are currently two possible ways to “possess” bitcoins. The traditional way is to have a bitcoin as a generated code in a so called “bitcoin wallet.”  This is the way most people think of a “real” bitcoin. However, a couple of years, changes were made so that you can “possess” a bitcoin by using a bitcoin trading website. These trading sites differ drastically in their legal structure. Some of these platforms just are handling trades of real bitcoins (and other cryptocurrencies) between private individuals.

Some are structured as a bank and you can create an account inside this online financial institution and buy and sell bitcoins there. In reality you never see your bitcoin and you do not really possess a real bitcoin or parts of it that you can use for purchasing or selling real goods (like a simple hamburger).  In this case you cannot take your bitcoin and make a purchase in a store witch accepts bitcoin payments or buying illegal goods on the internet. These sites or banks are just for traders.

This means that keeping your bitcoins safe has a lot to do with what do you want your bitcoin for: Using them as a digital currency to pay goods and services or as a way to make quick and easy money by speculating.

For those traders among the readers here, the best advise is to open an account on a secure and reliable bitcoin trading platform, which operates almost like a bank. They will try to take sure of your digital money is safe and no bitcoins getting lost because of hardware failure or hackers trying to steal them.

Remember that this already happened when the MtGox  bitcoin exchange became bankrupt in 2014 following many hacking attacks beginning in 2011 and a total loss of 744,408 bitcoins – then $400 million – now worth over $8 billion.  And this still happening: A Slovenian bitcoin exchange called NiceHash was hacked in early December 2017 and 4,700 bitcoins were lost.

When you really need your bitcoin as a real digital currency, then here apply the same rules as with every other digital file: Make several digital copies (a.k.a backups) of your bitcoin wallet (wallet.dat) on various storage media. For example, you can make a backup of your wallet on an external hard disk drive, an USB stick, or burn it to a CD. If you have a tape based backup system available, you can use that, too, since you could wait for another 50 years and still recover that bitcoin wallet. Another possibility is to backup your wallet in the cloud on one of the various cloud service providers. But remember to make sure that nobody is able to access your file since we are talking money here.

Another idea is to print out your bitcoin wallet. There is the possibility to create a so-called “paper wallet.” It consists of a public and a private key for each of your bitcoin addresses. The private key is always assigned to a bitcoin address. The wallet is – as the name suggests – like a basket were the private and public keys are stored in and is also referred to as “client software” for bitcoins. If you don’t back up your private key and you lose it, you can no longer access your bitcoin wallet to spend funds.

However you could print out the private key or the whole bitcoin wallet as a paper version and put this piece of paper in a fire-proof safe. This might be the safest variant to keep your bitcoins safe and secure. Here you have to keep in mind, that you need to purchase and use good paper (and more expensive) for the print out, otherwise the ink will vanish after a couple of years.



Picture copyright: Tim Reckmann / pixelio.de


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