Lesson

Protecting your Bitcoin

A lot of Bitcoin value has been lost or stolen over the years. In many cases, the loss was preventable. We’ll look at different ways you can lose Bitcoin, and how to protect against those losses. First, here’s the best way to protect Bitcoin for long-term storage using a paper wallet, also known as a cold wallet. The steps are, export your private keys, print them, store them, and restore when needed. The method varies from wallet to wallet.

So let’s look at some ways that people have commonly lost Bitcoin from digital wallets, and your best defenses for each.

First, there are losses that have nothing to do with Bitcoin itself. Scams. Some work like pyramid schemes, while others try to convince you to transfer your Bitcoin to another address, or put your password in a website, or something like that. The usual tips apply. Remember that as long as it can be easily sold, Bitcoin is money. So question every interaction you have with it. And although Bitcoin is new and cool, bad deals are still bad deals.

Now, onto the kinds of losses that are specific to Bitcoin. The first is one that I think is tragically under acknowledged by the Bitcoin community. Sometimes Bitcoin just sort of disappears. That can be through technical problems like a hard drive crash, or user error such as forgetting a password or accidentally deleting a file. Or physical damage, like dropping your phone in a lake. One researcher estimated in 2014 that 30% of all Bitcoin at that point had been lost forever.

He calls this lost value zombie Bitcoins. So again, a paper wallet is your best defense. A different kind of loss occurs when people leave their Bitcoin in a remote wallet, which then fails. The biggest example of this was when the Bitcoin exchange Mt. Gox went belly up in 2014, taking hundreds of thousands of Bitcoins with it. But Mt. Gox is far from the only example. The solution is to control your coins by storing only a small amount on remote servers.

Realize that Bitcoin companies don’t have to pass the same tests as a regular bank. So plan ahead of time. Some of those remote sites let you export your private keys to reimport them in a different wallet. Test out those systems before putting a lot of money in them. Finally we come to the kind of loss that actually occurs a lot less than people think. Direct theft from your personal computer. Basic computer security is your best defense. First, password-protect your computer and your Bitcoin wallet.

Second, never walk away from an unlocked computer. And finally, be careful about downloads, especially as there’s now malware that specifically targets Bitcoin wallets. The fact is, Bitcoin represents a whole new form of value, one that we as a population aren’t used to protecting. But despite all these scary stories, people around the world hold and use Bitcoin safely, and so can you.