How To Save and Protect Your Bitcoins

August 11, 2014 16:13 UTC
Like all financial assets, cryptocurrencies need to be safely saved and protected.

Cryptocurrency in its current state is largely a movement against the traditional banking system. However, this doesn’t mean you can’t use the platform to store value long-term, and recently, even to earn interest on your savings mimicking the nature of fiat bank accounts. For security and practicality reasons, it is recommendable when storing considerable forms of cryptocurrency to keep them in separate and more secure locations from the ones you would use for more regular transactions (this is commonly referred to as a “hot wallet”). There are a handful of options available for saving with cryptocurrency.

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Interest-Bearing Account:

Recently I’ve had the pleasure of having access to the beta of Delta Financial’s Interest Account. The account offers a minimum 5% AER on Bitcoin deposits, which is paid to your account daily. The funds in the account are also insured for any accidental losses or security breaches, and there is no obligation of time or minimum funds in the account (although deposits have to be a minimum of 0.001 BTC). The trade-off is that withdrawals from the interest account are only processed once every 24 hours, so your bitcoins will not be immediately accessible. After a month of using the system, I have no complaints. The interface is minimal, deposits are fast and interest has consistently been paid every 24-hour period without fail. Despite the insured aspect of Delta Finance, I will warn that the product is still in its beta and the company is still young, so tread with caution.

A notable alternative is BTCjam which is a peer to peer lending platform. BTCjam boasts up to 19.3% APR. The downside of the system, however, and the reason I don’t personally use it, is that you have to manage the loans yourself. This will take up time and leave you more susceptible to loss due to fraud. Recently, users have been reporting vulnerabilities on the BTCjam website, resulting in losses of deposited coins. Although the company is trying to pick up the pieces, I would recommend that you stay clear of this service at the current time.

Paper Wallets:

The QR codes still work with my poorly-printed paper wallets.

Physical wallets can be made easily through the use of generation software and a consumer-grade printer. Offlineaddress.com was the service I ended up using, and the process of creating a secure offline wallet was incredibly easy. All you have to do is load the page and then disconnect your internet connection to ensure the keys you generate can’t be compromised (offlineaddress.com even warns you in the event you try to generate while still connected to the internet). After this, all you have to do is select the number of addresses you want to generate and provide random entropy with mouse movements for the software to seed the addresses.

Paper wallets are, in my opinion, the best implementation I have seen of QR codes to date. QR codes are often used ineffectively as a marketing gimmick for advertisers to give consumers further information when a simple memorable URL would suffice. The seemingly random strings of characters used in public addresses and private keys are a perfect candidate for this technology. These strings cut down entry times and reduce human error for Bitcoin addresses and keys. Most, if not all, mobile wallet apps should have some QR functionality.

Although using cold storage in the form of a physical wallet will not provide you with interest like some online accounts, it is undoubtedly the most secure method. If created correctly on an offline machine, nobody else can know what your private key is. There are plenty of guides online for creating cold storage in ideal conditions.

Alternatively if you don’t want the hassle of creating your own cold storage, Coinbase has recently started offering it’s online wallet users a service called Coinbase Vault. Coinbase Vault allows you to use secure offline storage with the convenience of an online wallet.

PoS (Proof of Stake):

Certain altcoins offer “proof of stake,” a technology not available to Bitcoin. Proof of stake is an alternative to the proof of work seen in cryptocurrencies such as Bitcoin (The process of mining for coins). Proof of stake is a method of securing a cryptocurrency network by providing coin holders an incentive for “minting” new coins (similar to mining) by leaving their wallet client open on a computer. The process of “minting” via proof of stake is less destructive than the power intensive mining process found in proof of work cryptocurrencies, and allows you to receive interest based on a percentage of the amount of coins you hold in the staked wallet. More specific information on proof of stake can be found here.

Featured image by Shutterstock.

Last modified: August 11, 2014 18:26 UTC

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@gravysam

Computer Science Student. Excited for the future of cryptocurrencies.