How to protect your Bitcoin
Cryptocurrencies have been very hot in the news, especially in the last few months. This is primarily due to the fact that they have drastically gone up in value, especially in the last six months. Bitcoin, the digital currency based on blockchain technology (and undoubtedly the most prolific cryptocurrency on the market) has seen a huge increase in value recently, with 1 Bitcoin being worth over $20,000 towards the end of 2017.
However, it is now starting to drop drastically; at the time of writing this article it had lost almost 50 percent of its value and is currently being traded at around $11,500. Compared to the beginning of 2017 it has gone up in value by 1,342 percent you definitely wouldn‘t see that kind of return on the usual stock exchanges.
People who bought Bitcoin on 4th April 2011, have since become millionaires. Someone who bought 100 Bitcoin that year for less than $10 now has seen them rise to a value of around $1,150,000. Even just 10 Bitcoin purchased at the time will have a current value of over $100,000 at the time of writing this blog (more or less, since the market is incredibly volatile).
The rise of the Zombie coins
This surge in value over the past few years has led to many people now trying to find and recover Bitcoin that they may have purchased for fun or out of curiosity at the time. However, the Deputy Head of Technology of The Telegraph already stated two years ago that many Bitcoin from the total amount that was mined up until that year were already lost. According to an estimate from NVDIA engineer John Ratcliff, almost 30 percent of all Bitcoin created from its inception in 2009 until 2014 are now referred to ‘Zombie coins’. These are Bitcoin that have not been used for over a year. If you take that estimate in regards to the 13.7 million Bitcoin that were mined up until the middle of 2014, a total of 4.11 million Bitcoins have not been used since, which means one can guess that a lot of them are gone for good.
Why is this?
There are many stories about people who remember that they had Bitcoins but ended up losing or damaging their storage media. In one case, an individual from Newport wanted to pay the council to find his discarded hard drive in a waste recycling centre, which contained his private key to access 7,500 Bitcoin. Another case saw someone who mined 10 Bitcoin in 2010, put them on a USB stick and forgot about it. When he found out that price had gone up, he was not able to find the USB stick anymore.
How to protect your Bitcoin?
Currently, there are two possible ways to ‘possess’ Bitcoin. As they’re not a physical currency, the traditional way is to store Bitcoin as logical code in a ‘Bitcoin wallet’. This is the way most people think of ‘real’ Bitcoin. However, in the past couple of years, it is now possible to get Bitcoin by using dedicated trading websites.
These trading sites differ drastically in their legal structure. Some of these platforms just are handling trades of real Bitcoin (and other cryptocurrencies) between private individuals. Some are structured as a bank and you can create an account with this online financial institution, which enables you to buy and sell Bitcoin.
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 pint of milk or your morning coffee). What’s more, with the latter you cannot take your Bitcoin and make a purchase in a store or website which accepts Bitcoin payments; these sites or banks are just for traders.
As a result, this means that keeping your Bitcoin safe has a lot to do with what do you want to use it for using it as a digital currency to pay for goods and services or as a way to make money by trading, much like traditional currency markets.
For any existing or aspiring traders reading, the best advice is to open an account on a secure and reliable Bitcoin trading platform, which operates almost like a bank. They will ensure your digital money is safe and no Bitcoin gets lost because of hardware failure or hackers trying to steal them.
However, keep in mind that this already happened when the MtGox Bitcoin exchange became bankrupt in 2014 following many hacking attacks which started in 2011. In total, 744,408 Bitcoin were lost – valued at $400 million then and, now worth over $8.5 billion. In fact, it’s still happening: A Slovenian Bitcoin exchange called ‘Nicehash’ was hacked in early December 2017, losing 4,700 Bitcoin in the process. The list goes on and on.
It is therefore very important to prioritise security when deciding to use a Bitcoin trading bank.
Ways to back up your Bitcoin
When you really need your Bitcoin as a spendable digital currency, then apply the same rules as with your personal data: make several backups of your Bitcoin wallet (which is a ‘wallet.dat’ file) on at least two different types of storage media. For example, you can make a backup of your wallet on an external hard disk drive, a USB stick or burn it on DVD. Keep that storage device off your network in a safe location – that way you rule out any kind of cybercrime threat.
If you have a tape-based backup system available you can use that too since you could technically wait for another 50 years and still recover your Bitcoin wallet with no issues.
Another possibility is to back up your wallet in the cloud using one of the various cloud service providers. However, take some precautions to restrict access to your account and regularly update your password – after all, we’re talking about money here!
Printing your Bitcoin
Another idea is to print out your Bitcoin wallet. It sounds primitive, but there’s actually some method to the madness. You get 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 where 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, permanently.
However, by printing out the private key or the whole Bitcoin wallet as a paper version you end up with a secure way of backing up your Bitcoin. Just make sure you put this piece of paper in a fire-proof safe and use a good printer/paper. The last thing you’d want is to come back years later and find something wasn’t printed properly!
Seems somewhat backwards that with all the technology in today’s world it might be best to go back to paper, but sometimes the old ways are the best!
Do you have Bitcoin? What steps do you take to protect it? Let us know by tweeting @OntrackUKIE