This post is the second in a series of articles about Bitcoin and focuses on how to trade Bitcoin safely. For Stage 1, about buying Bitcoin, please click here. Stage 3, about storing your Bitcoin securely, will be available soon.
Think you’re ready to trade Bitcoin? Before you trade Bitcoin, Ethereum, or any other digital asset, you’d be wise to follow this short, step-by-step guide to ensure you’re taking the appropriate safety measures to keep your Bitcoin safe.
In Stage 1 of our Bitcoin series, we explained how to buy Bitcoin safely. We’ll be referring back to a number of ideas discussed in the previous post, so please read it first. You should also be familiar with these important Bitcoin terms before you continue—otherwise you may end up scratching your head, or worse, smashing your computer. Because honestly, this stuff is complex.
While Bitcoin is intended for a mass audience, the tools and systems developed to buy, store, or trade Bitcoin are still young and can be difficult to use and secure. Stay vigilant with your digital assets and don’t just assume that Bitcoin exchanges have your best interests at heart or that they’ve put in the required work to secure your funds.
Exchanges Are Vulnerable
If your Bitcoin is on an exchange, it is not only vulnerable, but it goes against one of the core principals of Bitcoin: If you don’t control your private keys, you don’t own your funds.If your Bitcoin is on an exchange, it is not only vulnerable, but it goes against one of the core principals of Bitcoin: If you don't control your private keys, you don't own your funds.Click To Tweet
Most popular exchanges (popular = liquid) used today are centralized exchanges. This includes Coinbase, Binance, Bittrex, and most other exchanges you’ve probably heard of or used.
If you use a centralized exchange, it means you are trusting a third party with your private keys. It also means that they are a single point of failure—should the exchange get hacked, everyone who entrusted their funds to that exchange will be at risk of losing them forever.
Don’t believe us? Mt. Gox, which at the time handled 70% of Bitcoin transactions worldwide, was a centralized exchange hacked in 2014 to the tune of 740 thousand stolen Bitcoin. It went bankrupt soon thereafter.
Remember, once Bitcoin is removed from your wallet, there is no entity, like a bank, to help you retrieve it—even if it is stolen in a hack or breach.
So, where should I store my Bitcoin?
We’ve already demonstrated the risk associated with storing your money on any centralized exchange that holds your private keys, which is why we recommend storing money on an exchange only in small amounts and only if you’re planning to trade in the short term.
As for your long-term investments? We recommend storing your Bitcoin and other digital assets using a hardware wallet (e.g. Ledger).
How to Trade Bitcoin Safely Using Exchanges
Since exchanges are inherently unsafe, you’d think that they’d at least enforce strong password and account security practices. You’d be wrong.
Dashlane researchers found that over 70% of exchanges leave their users’ accounts perilously exposed to financial theft due to unsafe account and password practices.
So, exchanges are an unsafe place to store your Bitcoin long-term, and they don’t help themselves by adopting lenient account protections and allowing users to create weak passwords.
Don’t conflate “popular” with “secure” when it comes to exchanges.
Trade Bitcoin safely by following these three easy steps:
- Step 1: Use strong passwords
- Step 2: Use 2FA
- Step 3: Store any digital assets offline that you’re not actively trading
Step 1: Strong Passwords
The easiest way to ensure strong passwords for each exchange is to use a password manager.
Password managers eliminate reused credentials across sites and allow you to generate complex, unique passwords easily. Those passwords are stored securely and can be accessed (only by you) anytime from any device—cross-device functionality is critical since you never know when or where you’ll need to execute a trade.
A strong password is your first factor of authentication.
Step 2: 2FA
As you might expect, 2FA (or two-factor authentication) serves as the second step in authenticating your login and should be enabled on every exchange that you sign up for. Our previous post has a detailed explanation of how to setup 2FA appropriately when buying or trading Bitcoin—read it here under “Step Five.”
2FA shouldn’t only cover your logins; you should also require it to transfer funds, and it can, in some cases, be used to authenticate each trade you execute.
Step 3: Store Long-Term Digital Assets Offline
Are you a day trader? Go bonkers. Keep your digital assets on an exchange and trade until you’re blue in the face. Just don’t say we didn’t warn you if your exchange gets hacked and you lose your funds forever!
Keeping your digital assets offline in cold storage is the only way to truly keep hackers away. The trade off here is that you are 100% responsible for those digital assets.
Always backup your private keys! This isn’t a drill—you can’t have too many backups. Store them offline in multiple secure locations for maximum security and peace of mind.
In the final post in this series, we’ll go deeper into the ins and outs of storing Bitcoin. We’ll add a link to that post here when it’s published.
In the meantime, you can now trade Bitcoin more safely using the guidelines we outlined above.