Is Bitcoin Safe? Find Out Here

Bitcoin can be safe to use, but you'd better know what you're doing.

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Bitcoin offers lots of benefits, but is it safe to use? Convenience and lower fees aside, customers can easily lose large amounts of money if they don't know what they're doing with security. But if they use the right tools and techniques, they can be more protected than if they were dealing in cash, or with their bank.

Bitcoin Horror Stories

The bitcoin world has been littered with stories of tragedies.

Two main things seem to happen: either people get hacked, or they lose the all-important private keys that unlock their bitcoin addresses.

One of the biggest stories about lost bitcoin happened in summer 2013 when James Howells threw an old hard drive into the garbage. The drive contained a digital wallet holding 7,500 bitcoins.

They were worth almost nothing when he bought them in 2009, but when he realized what he'd done, they were worth more than £4 million. By the time he understood his loss, they were sitting somewhere in a landfill.

Protecting Bitcoins with Better Wallets

If you lose your private keys, the same fate might befall you, but it isn't necessarily the case. These days, wallets are more sophisticated.

Hierarchical deterministic (HD) wallets have a couple of useful security features. Like many other bitcoin wallets, you can use them to generate lots of different bitcoin addresses.

But you can also share easily share subsets of these addresses with other people without giving up all of them. That might be useful if you wanted to share some bitcoin addresses with a friend or spouse, for example.

Secondly, HD wallets let you recover the bitcoin addresses inside them, even if they are lost.

This is because HD wallets are secured using a simple phrase that you choose. If you lose your wallet, you can regenerate all of the addresses by reinstalling HD wallet software and re-entering that phrase. That is far easier to remember – or even write down and put in a safe – than a bunch of private keys.

However, this also creates potential problems. The phrase that you choose must be sufficiently hard to remember that other people couldn't hack into it simply by using a computer to guess the combination of words in the phrase. So a random series of words is best.

Avoiding Hackers

Hacking is another problem. Most machines, especially PCs, are prone to malware. And online web-based wallets have been hacked in the past. Using one of these services means that you are often trusting your security to a third party company.

One option to secure your bitcoins from hackers is by keeping your private keys away from the Internet altogether, by using a paper wallet. Read all about paper wallets here.

Some companies have developed hardware wallets, designed with security in mind, to be protected from hackers. Trezor is one of a growing number of hardware wallets designed to protect your private bitcoin keys.

When you want to make a transaction using your bitcoin address, you connect Trezor to a compatible software wallet by plugging the device into your computer. When you try to make a transaction with your software wallet, you must press the 'confirm' button on your Trezor to complete the process. At no point is your private key ever communicated to your computer, hopefully thwarting any malware trying to pilfer your precious coins.

Multisig Wallets

The other option to help you protect your bitcoins is to use wallets supporting multiple signatures (multisig). These wallets, available from companies like BitGo, require multiple private keys to authorize a bitcoin transaction. They can help to prevent hackers from walking away with your bitcoins, by keeping the private keys in different places (one on an online web service, and one on your local hard drive, say).

 

There's no doubt about it, bitcoin users need to educate themselves a little before holding too much of their money in this new currency form. But using secure wallets and being sensible about where and how you hold your private keys can eliminate a large percentage of the threat.