Join us for the first in our series of ‘Blocksafety’ articles, where every month we provide a short, easy-to-understand safety tip for blockchain beginners.
One common phrase you’ll come across in the crypto space is ‘not your keys, not your Bitcoin’. This maxim describes the fact that centralised/custodial exchanges (such as Coinbase, Kraken, Binance, etc.) own the private keys to your account. Although this can be helpful for beginners (in the case that you forget your password and get locked out etc.) it also presents a number of risks.
Pretty much every centralised exchange in the space has suffered hacks, some of which were fatal. One of many such cases was the infamous Mt. Gox hack, where hackers managed to steal 740,000 Bitcoin, forcing one of the biggest exchanges in the space to file for bankruptcy. Users of the exchange lost their funds, and are still waiting for compensation today, 4 years on.
To avoid this scenario and other dangers (such as the possibility of custodians freezing your account) crypto investors should look to store their funds in non-custodial wallets. This means that you, and you alone, are the owner of the encryption keys which protect your account, and also that you don’t have to go through KYC (Know Your Customer) controls, and risk having your identity stolen along with your funds.
Popular examples of such wallets are Electrum (a simple, easy to use desktop wallet for storing, receiving, and sending Bitcoin) and Metamask (a browser application that lets you store, receive and send Ethereum-based assets, and interact with dapps (decentralised applications) that are built on Ethereum.
These non-custodial wallets do not store your keys on their servers and have no possibility of accessing your account, so you will have to take responsibility for writing down and safely storing your seed phrase (a jumble of words that you can use to restore your account in the case that you lose your device or forget your password).
Although this sounds daunting, it’s actually pretty easy once you get the hang of it. Write the seed phrase down carefully on a slip of paper, double-check that it’s correct, and then store it safely inside a safe box or another hidden place. If you wish to keep a digital copy, you could keep it in an encrypted file (a word document that requires a password to open it) via encryption software such as VeraCrypt. We’ll go into more details about how to encrypt files next time, as well as how to store your digital assets in cold storage.
Until then, stay safe, and if you have any questions, feel free to reach out to our friendly and knowledgeable Blocksafe advisors.