Like many of the other cryptocurrencies, Bitcoin uses cryptography as part of the protocol. For transaction verification and Proof-of-Work (PoW), it uses SHA-256 encryption. SHA-256 generates unique 32-byte signatures for texts. It is one of the strongest hash functions currently available. In fact, it has not been compromised yet.
Security problems are not caused by the Bitcoin protocol itself but by how users, sites, and services manage and handle bitcoins. You can learn more about bitcoins and different bitcoin transactions here.
So what’s the safest way to keep and use bitcoins? Here are some tips for you to follow:
One: Store bitcoins offline.
Wallets are often stored digitally, either online or locally. However, there’s a more secure way to store your bitcoins. You can choose cold storage or store your bitcoins offline. A cold storage wallet is not connected to the internet. It takes your private key offline. Thus, it is less vulnerable to hacking.
The downside of cold storage wallets is that it’s inconvenient. So, you can keep a small amount of your bitcoins in a digital wallet.
Two: Be wary of online services.
There have been several security-related issues with sites that deal in bitcoin. The most notable of these is Mt. Gox and Silk Road 2.0. Mt. Gox lost $468 million worth of bitcoins due to poor accounting and security. Meanwhile, Silk Road 2.0 got $2.7 million worth of bitcoins stolen from their escrow account.
So if putting bitcoins on sites and exchanges such as Mt. Gox and Silk Road 2.0 is dangerous, why do people do it? Though bitcoin’s strength is in its lack of central authority, it’s also its weakness. People need a way to regulate the bitcoin ecosystem and ensure that exchanges are secured and trustworthy. This said, you just have to be wary of the online sites where you put your bitcoins.
Three: Backup your wallet.
Why do you need to back up your wallet? The reason is simple. You need to protect it from human mistakes and computer failures. If your hardware fails you, you can use your backup to recover the currency stored in your digital wallet. Make sure that you store your backup in different secure locations like a CD, hard drive, and USB. Also, don’t forget to set a strong password for the backup.
Four: Keep your software up to date.
A wallet that runs on an old bitcoin software is more susceptible to hacking. Using the latest version of the Bitcoin software can prevent severe security problems as it often includes new security fixes and other useful features. Thus, it can protect your wallet better. Install the software updates not only on your computer but also on your mobile phone.
Five: Encrypt your wallet.
When you encrypt your wallet, you set a password for persons that will try to withdraw funds. In other words, encryption adds another layer of security to your bitcoin wallet.
In creating your password, make sure that it contains numbers, letters, punctuation marks, and symbols. It should at least be 16 characters long. The strongest passwords are those generated by trusted programs. These are harder to memorize but are definitely more secure.
Six: Use multi-signature.
Bitcoin has a multi-signature feature which allows a transaction to take place only when it is approved by multiple independent people. Organizations and web wallets use it to give the user the chance to control their wallet by preventing theft when a single server or device is compromised.
You can lose your bitcoins forever if you don’t have any security plan. Taking caution in handling your bitcoins can make a big difference.