What to do if your crypto is hacked and how to prevent it
Bitcoin and other cryptocurrencies are gaining traction rapidly as a legitimate investment and as currency. Experts disagree on how to classify cryptocurrency. But whether you consider it an asset to hold or a currency to spend, it is digital money. Like other digital assets that increasingly define our modern existence, crypto carries certain risks, and the foremost of these is cryptocurrency theft through hacking.
We often think of cryptocurrency and hacking together, mainly because hackers, more formally known as threat or malicious actors, demand seven- or eight-figure dollar ransom values in cryptocurrency, due to its untraceability. But cryptocurrency itself can be hacked. Blockchain technology is implicitly secure, and very difficult to hack. However, the theft of cryptocurrency usually occurs outside of the blockchain. Hackers gain access to your cryptocurrency either via your wallet or your exchange account. If you already hold cryptocurrency, you know what these terms mean. For anyone unfamiliar with them, here’s an explanation.
Once you have purchased your cryptocurrency, you need to store it safely. You can’t deposit it in your bank account or hide it under your mattress. Cryptocurrency is stored – and exchanged – using a digital or crypto wallet. It’s a bit more complicated than that, but this is a good way to think of it. Your cryptocurrency is actually stored on the blockchain, as a long string of encrypted numbers called a token. Each token is assigned a private key, which is held by you as the owner (or by your appointed custodian). It is this key that is stored in the digital wallet and gives access to the token. The crypto wallet keeps your private keys safe and accessible. Your key is your proof of ownership and it “unlocks” your ability to transact. If you lose your private key, you have no way to prove ownership of your cryptocurrency. You effectively lose your money.
Hot vs. cold wallets
A crypto wallet is a software application that is installed on your computer or on a mobile device where you store your private key. The key can even be written down on paper, but that is intrinsically risky, even if kept in a safe, due to the danger of fire or water damage or old-fashioned loss or theft. Wallets are either “hot” or “cold”. There are pros and cons to each type of wallet.
A hot wallet is online. You can access your hot wallet from any internet-enabled device, including your cell phone, tablet, or laptop. It is easy to use and most wallets have a very well-designed interface. Hot wallets are popular for their convenience; you can store, send and receive, and manage your cryptocurrency tokens all in one place. They are also usually free, though some may charge interest on your holdings. However, a hot wallet is easier to hack precisely because it is online.
A cold wallet is offline and therefore much less susceptible to hacking. A cold wallet is a physical device, much like a USB stick. There are also paper wallets, with a QR code embedded in the paper. However, if anything happens to the paper the wallet is useless. Similarly, if you lose the hardware wallet, you have lost your private key and all access to your cryptocurrency. But as long as you keep these tools entirely safe, they are less risky than hot wallets.
A cryptocurrency exchange is an online platform for buying and selling cryptocurrency, just as a stock exchange is where stocks and shares are traded. A crypto exchange behaves like an online broker, charging fees for transactions and allowing you to trade your crypto. As with stockbrokers and insurance brokers, fee structures vary, and some exchanges are better than others. It is where you store your cryptocurrency – remember your digital wallet only stores your private key. Some currency exchanges also offer key storage facilities.
How is crypto hacked?
The blockchain itself could theoretically be hacked, but the level of encryption used means it would take literally years of attempts to succeed. However, cryptocurrency exchanges are frequent targets for hacking. Thieves want access to the cryptocurrency keys. For this reason it is not considered wise to use key storage provided by an exchange. Some exchanges are more secure than others. When considering which crypto exchange to use, do your homework and look for a reputable exchange with high security. In this instance, ease of use is not a good sign – or at least it should not be easy to create an account. If it’s too easy, it could indicate a less-than-trustworthy exchange.
Hot wallets can also be hacked, as can cold wallets during the time they are connected to the internet. Hot wallets are cheap and convenient but they carry risk. Experts recommend the use of cold wallets as the most secure option. It’s inadvisable to store your private keys on any device that is permanently connected or accessible, even if it is not an online platform. It’s worth remembering that malicious actors are not amateur “hackers” but highly sophisticated and skilled engineers, often backed by organisations or nation-states. They are dedicated to finding vulnerabilities in digital systems. The bigger the prize, the harder they work.
How to prevent a crypto hack
Investopedia, an online financial news magazine providing educational content on finance and investment, offers the following tips for keeping your tokens safe and preventing cryptocurrency theft through hacking:
- Don’t store your keys in the wallet on your mobile device or any other device that has a connection to the internet.
- Your private keys should always be held in cold storage.
- Don’t let someone else store your keys for you unless you’re comfortable with the risks.
- If you want to use your cryptocurrency, only transfer the keys you need to your hot wallet, conduct your transaction, then remove them from the hot wallet immediately.
- Keep your cold storage method in a secure, humidity-controlled environment without a wired or wireless connection.
- Check on your devices periodically to ensure they’re not degrading. If they are, transfer your keys to a new storage device.
- Never share your private keys with anyone else.
Recovering from a hack
But what if this information has come too late for you? What should you do if you are already the victim of cryptocurrency theft? Unfortunately, you are very unlikely to get your money back. Unlike credit card fraud, where laws in most countries limit the amount of liability suffered by the credit card holder (usually US $50 or local equivalent), cryptocurrency is not regulated or protected by similar laws. This is one of its attractions. But it also leaves you high and dry if you are the victim of cryptocurrency theft. It’s similar to having cash stolen. The blockchain can be monitored to trace where the currency goes after it leaves your wallet, but actors are likely to trade the currency on an exchange for a fiat currency (hard currency such as dollars) immediately. You may be able to find the identity of the thief, but this information is unlikely to help you recover your money.
However, there are still steps you should take. Firstly, report the theft to the police. Theft is theft. The police lag the hackers in cyber skills, and they are unlikely to apprehend the criminal, especially if the hacker is sitting in Russia or North Korea, but it is important for the authorities to gather information so we have a realistic picture of the scale of the problem.
Secondly, notify your bank. There may be transaction costs incurred by the hacker that hit your bank account. Advise your bank that these are unauthorised transactions. It may refund them to you, depending on your bank’s policy. Notify the crypto exchange you used. Even if the theft did not occur on the exchange itself, your service provider needs to know that a breach has happened. It may be able to gather information about the transaction that could be helpful later. And it will be alerted to examine its own security measures.
Don’t let history repeat itself
At this point you’ve done all you can to trace the theft. But you also want to ensure it doesn’t happen again. Provided you can still log in to your exchange account and your hot wallet (if you use one), change your password and any other security information. Enable two-factor authentication. This will lock further hackers out and protect any tokens that may still be in your possession. Then check all your devices for malware. The hacker may have penetrated your network via a malicious software infection that pre-existed the attack. Scan all devices you use to handle your currency. Make sure they are clean.
Lastly, don’t brag about owning cryptocurrency! It may be growing in popularity but you’re still ahead of the curve. It’s exciting news to share with friends or on social media. But social media is a public space, and you never know who is listening when you’re in a bar. Keep your financial information private. Set up a new email address that is exclusive to your cryptocurrency account and separate from your work and personal emails. This will reduce the chance of you being “phished”, i.e., targeted via your email account. And use two-factor authentication, ideally via an authenticator app rather than SMS.
For more information
Do you want to know more about cryptocurrency? SD Law is a firm of experienced attorneys based in Cape Town, with offices in Johannesburg and Durban. If you want more information about this new world, or need assistance with other digital concerns, including compliance with POPIA, cyberbullying and cybercrime, call Simon on 086 099 5146 or email firstname.lastname@example.org.
- What is cryptocurrency?
- Cryptocurrency – the wild west or a carefully regulated environment?
- Cryptocurrency – myths and misconceptions
The information on this website is provided to assist the reader with a general understanding of the law. While we believe the information to be factually accurate, and have taken care in our preparation of these pages, these articles cannot and do not take individual circumstances into account and are not a substitute for personal legal advice. If you have a legal matter that concerns you, please consult a qualified attorney. Simon Dippenaar & Associates takes no responsibility for any action you may take as a result of reading the information contained herein (or the consequences thereof), in the absence of professional legal advice.