Thursday, February 15th 2018
Confessions of a Crypto Miner: Storing Your Coins
Welcome back to Confessions of a Crypto Miner, my bi-weekly column about a crypto miner from 2013 trying to get caught up with the latest standards. I'm presently mining and reporting to you from a dual-GTX 1080 based rig mining zCash.
As requested by many readers, today, we are going to talk about safekeeping your digital currency, and particularly, how to do it safely. Crypto has gotten a bad rap as of late for being insecure, due to numerous hacks of exchanges - but the cryptography in it is actually very strong and solid, and nearly all hacks have been related to centralized services or bad practices.
The focus of this article will be how to hold coin safely for the purpose of investment. I will go over the types of wallets, and their pros and cons. It may seem a bit more technical than some of my usual works but it is very essential information that everyone considering crypto should know. I've done my best to boil it down to basic, easy to understand principles for you.
A quick note, however. This column seeks to tell you how to store coins long term in a safe fashion, but it does not necessarily recommend you do so. TechPowerUp does not give financial advice, and I'm not about to start. It's true that the crypto market has had a bad run over the past two weeks since my last column, but how you respond to that is up to you. Me? I'll still be here mining for the full year, as I promised (and it's still pretty profitable, by the way).
That said, I won't shy away from explaining some general principles I use in my own personal investments. As an example, my miner... right now, is running at full steam ahead with only one change to procedure: I've stopped cashing out. In the month of January, I made approximately $210 (about $170 after electric). This places me on target for a healthy earnings at year end, when considering the usual 1 year interest free credit promotion. What's making things complicated at the moment is the sharp drop of earning recently. I'm making only $100 after electric at the time I shut off the payouts. Why stop payouts? Because I fully expect markets to rebound. They have historically, after all, and to date this has already proven to be a healthy decision as my holdings (which are held in Bitcoin Cash) have appreciated nicely. Whereas for what little of February we have been through, at the low I would've been cashing out for probably around $40, I am now looking much more at the $70 range. The tip here is sometimes it is better to hold your coins than to panic and cash out immediately.
Now, how do we hold coin? We have to use a wallet, of course. Your virtual currency is stored inside wallets, of which there are basically four main types, which I will discuss in order from most secure to least secure: Offline Wallets, Online Full Node Wallets, Online Light Wallets, and Web Service Wallets. To be more precise, the wallet itself doesn't store the actual currency (like a physical wallet would do), rather it stores the private and public keys that authenticate a record in the block chain to be "your money".
Offline Wallets
Let's start with the most secure wallet option, the so-called "Offline Wallets." It is perfectly possible in Bitcoin and all crypto-currencies, to send money to an offline device and address. This includes something as simple as a piece of paper (my preference). How does this work? Well, at its core, all the cryptocurrencies follow a very basic principle: Public-private key cryptography. The private key is used to send money, and the public key is used to receive it. When you write down a public private key pair, you have a wallet. An example of how this works can be found at some client-side Javascript address generators such as can be found at sites like bitcoinpaperwallet.com. You then simply send money to the public key, and that private key isn't going anywhere short of being stolen. This is by far the most secure option.
Online Full Node Wallets
As secure as the idea of storing crypto on paper is, it isn't particularly convenient for what is touted as an "internet currency." You probably want to use some form of wallet software to store or manage your keys. The two types of self-managed wallet software available are known as "full nodes," or "light" wallets, respectively. Full nodes do a full sync with the network and are slightly more secure than light wallets. The original Bitcoin implementation, Bitcoin Core, is an example of a full node. They use a lot of disk space, bandwidth, and memory though (easily several tens of gigabytes in diskspace alone for downloading the complete blockchain).
Online Light Wallets
To address the full node performance limitations, a protocol known as "SPV" was developed. "SPV" stands for "Simplified Payment Verification" and what really matters to us about it is what it enables: It enables us to spend crypto without having to have the machine download the entire blockchain. This eliminates the dreaded "sync time" (which in Bitcoin's case, can last days) and lowers disk space and memory requirements. It is theoretically less secure because it relies on outside servers to do the "heavy lifting" of transactions, and although no known ways to lie about transactions are known via SPV, that's not to say there won't someday be an exploitable discovery made in it. It is a very unlikely but still present possibility that has me consider it less secure than the full node wallet model. Examples of light wallets include Electrum and its many derivatives, and this is personally my wallet type of choice.
Web Wallets
The final wallet type is the web wallet. Most web wallets rely on centralized servers and bookkeeping, and in doing so, they break everything that is great about crypto. You are not the only person who knows your private key; their servers store it, too. When they are hacked and they lose it, that's how funds get stolen, because their central books suddenly mean nothing and the funds in the private key are gone. Almost all big coin hacks have occurred at this type of wallet. I cannot recommend this wallet type, but the most secure among them is probably coinbase.com, one of the bigger Bitcoin exchanges. The only reason I consider them even slightly better than the rest is because they openly admit they use offline wallets ("cold storage" in their terms) to store the vast majority of their funds, limiting damage.
I hope this has been educational for everyone. If you take only one thing away from this article, take this: If you don't have the private key, you don't really have the money. Invest safely, everyone!
As requested by many readers, today, we are going to talk about safekeeping your digital currency, and particularly, how to do it safely. Crypto has gotten a bad rap as of late for being insecure, due to numerous hacks of exchanges - but the cryptography in it is actually very strong and solid, and nearly all hacks have been related to centralized services or bad practices.
The focus of this article will be how to hold coin safely for the purpose of investment. I will go over the types of wallets, and their pros and cons. It may seem a bit more technical than some of my usual works but it is very essential information that everyone considering crypto should know. I've done my best to boil it down to basic, easy to understand principles for you.
A quick note, however. This column seeks to tell you how to store coins long term in a safe fashion, but it does not necessarily recommend you do so. TechPowerUp does not give financial advice, and I'm not about to start. It's true that the crypto market has had a bad run over the past two weeks since my last column, but how you respond to that is up to you. Me? I'll still be here mining for the full year, as I promised (and it's still pretty profitable, by the way).
That said, I won't shy away from explaining some general principles I use in my own personal investments. As an example, my miner... right now, is running at full steam ahead with only one change to procedure: I've stopped cashing out. In the month of January, I made approximately $210 (about $170 after electric). This places me on target for a healthy earnings at year end, when considering the usual 1 year interest free credit promotion. What's making things complicated at the moment is the sharp drop of earning recently. I'm making only $100 after electric at the time I shut off the payouts. Why stop payouts? Because I fully expect markets to rebound. They have historically, after all, and to date this has already proven to be a healthy decision as my holdings (which are held in Bitcoin Cash) have appreciated nicely. Whereas for what little of February we have been through, at the low I would've been cashing out for probably around $40, I am now looking much more at the $70 range. The tip here is sometimes it is better to hold your coins than to panic and cash out immediately.
Now, how do we hold coin? We have to use a wallet, of course. Your virtual currency is stored inside wallets, of which there are basically four main types, which I will discuss in order from most secure to least secure: Offline Wallets, Online Full Node Wallets, Online Light Wallets, and Web Service Wallets. To be more precise, the wallet itself doesn't store the actual currency (like a physical wallet would do), rather it stores the private and public keys that authenticate a record in the block chain to be "your money".
Offline Wallets
Let's start with the most secure wallet option, the so-called "Offline Wallets." It is perfectly possible in Bitcoin and all crypto-currencies, to send money to an offline device and address. This includes something as simple as a piece of paper (my preference). How does this work? Well, at its core, all the cryptocurrencies follow a very basic principle: Public-private key cryptography. The private key is used to send money, and the public key is used to receive it. When you write down a public private key pair, you have a wallet. An example of how this works can be found at some client-side Javascript address generators such as can be found at sites like bitcoinpaperwallet.com. You then simply send money to the public key, and that private key isn't going anywhere short of being stolen. This is by far the most secure option.
Online Full Node Wallets
As secure as the idea of storing crypto on paper is, it isn't particularly convenient for what is touted as an "internet currency." You probably want to use some form of wallet software to store or manage your keys. The two types of self-managed wallet software available are known as "full nodes," or "light" wallets, respectively. Full nodes do a full sync with the network and are slightly more secure than light wallets. The original Bitcoin implementation, Bitcoin Core, is an example of a full node. They use a lot of disk space, bandwidth, and memory though (easily several tens of gigabytes in diskspace alone for downloading the complete blockchain).
Online Light Wallets
To address the full node performance limitations, a protocol known as "SPV" was developed. "SPV" stands for "Simplified Payment Verification" and what really matters to us about it is what it enables: It enables us to spend crypto without having to have the machine download the entire blockchain. This eliminates the dreaded "sync time" (which in Bitcoin's case, can last days) and lowers disk space and memory requirements. It is theoretically less secure because it relies on outside servers to do the "heavy lifting" of transactions, and although no known ways to lie about transactions are known via SPV, that's not to say there won't someday be an exploitable discovery made in it. It is a very unlikely but still present possibility that has me consider it less secure than the full node wallet model. Examples of light wallets include Electrum and its many derivatives, and this is personally my wallet type of choice.
Web Wallets
The final wallet type is the web wallet. Most web wallets rely on centralized servers and bookkeeping, and in doing so, they break everything that is great about crypto. You are not the only person who knows your private key; their servers store it, too. When they are hacked and they lose it, that's how funds get stolen, because their central books suddenly mean nothing and the funds in the private key are gone. Almost all big coin hacks have occurred at this type of wallet. I cannot recommend this wallet type, but the most secure among them is probably coinbase.com, one of the bigger Bitcoin exchanges. The only reason I consider them even slightly better than the rest is because they openly admit they use offline wallets ("cold storage" in their terms) to store the vast majority of their funds, limiting damage.
I hope this has been educational for everyone. If you take only one thing away from this article, take this: If you don't have the private key, you don't really have the money. Invest safely, everyone!