Bitspark is a bankless money transfer company that helps you convert cash to cryptocurrency, globally.
With the rising popularity of digital currencies and a growing number of crypto-enthusiasts and laymen joining in trade, a range of shadow industries have cropped up intent on hacking their way into fortune. By nature, any form of trade comes with a degree of risk. However, there is no need to run additional risks when they can easily be avoided. Read our advanced tips to stay one step ahead of the game.
Three layers of security
Security is a matter of making well-informed choices and taking appropriate measures. It is therefore crucial to get a clear understanding of security around cryptocurrency and determine several ways to optimise protection.
1: Coins and tokens
The security of digital currencies is initially dependent on their underlying protocol. All cryptocurrencies rely on network protocols, whether original and unique or building on existing protocols.
When researching which currencies to trade with, make sure that they are not in any form centralised and no central authority has the ability to compromise distributed consensus. Learn about the genesis of the asset: who holds what and with what rights.
This is important because whichever party holds the initial stake can vote for transitions, and the network trusts those with higher stakes. Learning about the source and protocol of any currency is useful when determining where to invest trust.
Tether’s USDT for example, is a fiat-collaterised stablecoin maintained by a central authority. The company is the only source of validation of the USD peg which presents unnecessary risks to traders holding the coin.
Trading cryptocurrency occurs on platforms that are situated on a spectrum between decentralized exchange (DEX) and centralized exchange (CEX). We refer to this spectrum as the DeCe Scale.
CEXs operate off-chain, meaning they function as a third-party custodian for clients and do not record transactions on the blockchain. DEXs, on the other hand, rely on peer-to-peer transactions on the blockchain, allowing traders to be their funds’ own custodian.
CEXs still dominate the cryptocurrency world. However, with more than $1.37 billion USD stolen in crypto assets to date through fraud and hacks on CEXs, concerns over their security has proliferated. They have shown to be vulnerable, react inadequately to breaches and run with a high regulatory risk.
DEXs, by contrast, enable traders to remain in control of their funds by embedding their critical activities on the blockchain. DEXs leverage the technology behind cryptocurrencies, improving safety and transparency, and they resolve the risk of single points of failure. By rendering trade trustless, secure and private, DEXs are aligned with what makes blockchain technology so revolutionary and powerful in the first place.
Centralised custodians, like banks, run the risk of being heisted. Once breached, all assets are at stake which in the digital currency world effectively means suffering unrecoverable loss. DEXs, however, remove that risk and place responsibility with individual traders who merely need to protect themselves from pickpocketing.
Understanding currencies and trading them on a safer DEX are just the first two steps towards optimising security. Next in line are the ways in which traders, who hold their own funds, can take appropriate measures to protect themselves from theft.
Take it offline
While DEXs are considerably safer and minimise security risks for trading in general, it is still wise to prioritise trading in currencies that are supported by hardware which means they can be stored in cold wallets which are not connected to the Internet.
This entails storing digital assets on physical devices such as Trezor or printing out public and private keys with account information onto paper and afterwards deleting any trace of the keys in digital form. Disconnecting assets from the Internet effectively secures funds from hackers.
Limit funds in hot wallets
Of course, trading digital currencies takes place online, so hot wallets are necessary. Hot wallets such as cloud or multi-signature wallets are useful because they allow for efficient access to digital currencies. However, because they are vulnerable to cybercrime and fraud, it is best to keep only 20% of assets in such hot wallets, while safely holding the remainder in cold wallets.
Passwords & 2FA
Frequently changing passwords and if possible adopting a two-factor authentication method (2FA), such as the Google Authenticator App, significantly decreases the chance of accounts being compromised by phishing, network sniffing or keylogging.
Devices & Connections
Last, but not least, extra safety measures include:
Optimising cryptocurrency security depends largely on making well-informed choices about which currencies to invest in, being critical about where to engage in trade, and taking wise measures to protect wallets from hackers.
At all three layers where security is at stake, from the protocols underlying currencies and the exchange platforms for trade to the ways in which funds are held: decentralisation should be the guiding principle.
Bitspark is a bankless money transfer ecosystem that enables businesses and people to cash in and cash out cryptocurrencies across Asia and Africa.