Bitcoin has become very popular but there has also been several security issues. Is Bitcoin really safe?
A lot of sophisticated security has been included in Bitcoin. Although you may have a heard about plenty of Bitcoin security breaches, Bitcoin itself is actually very secure. Only one major vulnerability in the bitcoin protocol has been detected. That was back in 2010 but it was quickly fixed. But while Bitcoin may be secure, humans using Bitcoin often create security problems.
Theft of Bitcoins has happened several times, in some cases huge amount of Bitcoins have been stolen. The largest thefts have involved Bitcoin exchanges but several users have also lost Bitcoins stored in their wallets.
Bitcoin exchanges are marketplaces that allow users to sell or buy bitcoins using different currencies. Given the huge amounts of money, both bitcoins and other currencies, handled by the exchanges, they are prime targets for many attackers.
Bitcoins are stored in electronic wallets. The wallets can exist on a server in the Internet, on a user’s computer or offline. A wallet at an Internet site is similar to a bank account. Just be aware of that while most bank accounts are insured by financial authorities, Bitcoin wallets are not.
Obviously, there is not much a user can do about improving the security of a Bitcoin exchange. But by keeping just small amounts of bitcoins at an exchange you can limit your potential losses. It is a good practice to withdraw any excess funds as soon as possible from a Bitcoin exchange, leaving just a small amount in your account. You can move your funds either to a standard bank accounts, which typically is insured, or to an offline wallet. Unfortunately, several Bitcoin exchanges have made huge losses due to attacks, often inside attacks, and customers have lost some or all of their deposits.
Given that Bitcoin wallets are typically not insured, it is a good idea to keep most of your bitcoins offline. Limit the amount of bitcoins in your online wallets to what you need for the next few weeks. If you are going to do any large transfer, take the amount from an offline wallet and transfer the funds to the receiver as quickly as possible to limit the risk of theft. Nowadays, almost all online wallets offer additional security, so that your account is not protected just by a password. Always enable this option, sometimes called 2-Factor Authentication.
It is important to remember that you can lose your bitcoins also without being attacked by someone. If you have stored your bitcoins on your hard drive and the drive crashes, your bitcoins are gone unless you have made backups. Needless to say, always backup your bitcoins and store the backups in a safe place, or preferably in a number of safe places.
Another way of losing your bitcoins is by forgetting the password. There are some possibilities of recovering lost passwords but basic brute-force attacks are not feasible at the moment. It may be an option some time in the future when computers have become cheaper and more powerful. If you have some idea about what the password is, you can generate a list of possible password and try them. It is a long shot, so make sure to write down your passwords and keep them in a safe place. Computer-generated strong passwords are highly recommended but make sure that you have stored the passwords in several safe places, not just in one single password management program.
There are plenty of products which protects your bitcoins. One of the best solutions are small USB-key sized device with a small screen and two buttons which you connect to your computer when you need to transfer some bitcoins. The advantage of such devices is that even if your computer gets hacked or stolen, your bitcoins are still safe on the USB device, which you hopefully keep in a safe place when not needed. These USB devices typically also offer backups, so that you can recover your bitcoins even if the USB device is destroyed. At the moment, the Trezor hardware wallet is a very good solution for your bitcoins.