After all, the number of ways which you can trade bitcoin seem endless and despite numerous predictions of its demise in the past, it is still very much here today as the most prominent digital currency of them all. And we are still scratching our heads over who came up with it in the first place. Irony abounds.
In any case, you had best remain sober and choose not to look at bitcoin as a pure money making machine. For one thing, the price for entry is rather steep and for another, you do not get to maintain a digital wallet or use other exchange and storage services without security concerns.
So let us now get our eye in on what security is like with bitcoin, both protocols and services.
Encryption and the Blockchain
Bitcoin was the first ever cryptocurrency and there many more that propped up since its launch in 2009. Simply put, cryptocurrencies refer to digital currencies that use cryptography as the central element to their protocol so they are essentially decentralized. They are not validated by any government or bank.
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For its PoW (Proof-of-Work) system as well as its transaction verification, bitcoin uses SHA-256 encryption.
The backbone of bitcoin security is essentially the transaction blockchain – a chain consisting of multiple blocks which keep a record of transaction history. It begins with the so-called genesis block and it keeps building on further transactions and solved hashes to eventually form what we call a blockchain.
Double spending refers to the possible trickery of the blockchain into spending the same bitcoins twice, since a bitcoin is already considered spent when a transaction is verified. There are multiple ways by which it can be done. Assuming a trader does not await the transaction verification, an attacker can double spend on bitcoins by swiftly dispatching a couple of conflicting transactions into the network. Another way involves pre-mining a single transaction into a block and spending those same coins prior to releasing that block into the blockchain. The only catch is you are going to need an astronomical level of computing power to pull it off, or else it is better to do things legally.
You store your bitcoins in a wallet but your wallet does not actually store your bitcoins per se. Wait, what? Yes, it is perfectly reasonable. How a bitcoin wallet functions instead by containing a public key – like a bank account number – which is then used to receive bitcoins, and then there is a private key – like your ATM pin number – which you use to identify yourself as the owner of the bitcoins you want to sell.
Storing Bitcoins Offline
While a digital wallet is a storage option that only works online, there are even safer ways to store away your precious bitcoin. A perk you get from owning a digital wallet is it is not tangible. You can therefore have it printed and stored on paper. So now you have a paper wallet containing both your private and public keys on it.
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You can also try hardware wallets that also store critical details offline. The main benefit here is you are free of any threat posed by software or viruses since your private details are kept in a protected area of a microcontroller. Also, storing bitcoins in hardware wallets allows you use them directly, unlike with paper wallets, which must first be keyed in or transferred into software.
The bitcoin protocol itself is as secure as it needs to be but that is not counting in the numerous sites and services that deal with it regularly. It is best to study previous security-related cases to gain a better understanding of where to place your trust.
Yes, bitcoin is not without its issues concerning security and there is no shortage of cases which highlight that. But it is important to draw that all-important distinction between the protocols which are more or less faultless, and the people and services dealing with bitcoin, which are far more prone to a fault.