Security: Everything to Know

By  Beluga Research August 28, 2023

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  • Cryptocurrency security consists of measures to prevent unauthorized access to funds and information in the crypto ecosystem
  • Cryptocurrency security is rooted in the security features introduced by Satoshi Nakamoto, the creator of Bitcoin
  • Wallet security is crucial. Hot wallets, cryptocurrency storage devices that are always connected to the internet, are more vulnerable to hacking than cold wallets
  • Other crypto security measures include private key management, two-factor authentication and using secure networks and devices


Cryptocurrency security consists of measures to prevent unauthorized access to funds and information in the crypto ecosystem. Cryptocurrencies like Bitcoin have gained significant attention because they are decentralized. They offer a way to access funds without centralized authorities such as banks. Cryptocurrencies operate on decentralized networks called blockchains. Blockchains rely on complex cryptographic algorithms to secure transactions and maintain the integrity of the network.

A Brief History

The concept of cryptocurrency security can be traced back to the emergence of Bitcoin in 2009. Satoshi Nakamoto, the pseudonymous creator of Bitcoin, introduced several key security features to protect the digital currency from unauthorized access and double-spending. The features include public-key cryptography, digital signatures and PoW.

Security: Everything to Know

  • Wallet Security. Cryptocurrency wallets are essential tools for storing and managing digital assets. There are two main types of wallets, hot wallets and cold wallets. Examples of hot wallets include software wallets and online exchanges. Hot wallets offer convenience but are more susceptible to hacking. Cold wallets include hardware wallets and paper wallets. With a cold wallet, a user stores private keys offline. Cold wallets provide more security against online threats.
  • Private Key Management. Private keys are crucial for accessing and controlling cryptocurrencies. They are long strings of alphanumeric characters that serve as the digital signature of the owner. It is essential to keep private keys secure and confidential. Users must exercise caution. They should not share private keys or store them on vulnerable devices or online platforms.
  • Two-Factor Authentication (2FA). Two-factor authentication adds an extra layer of security to cryptocurrency accounts. 2FA requires a second form of verification, such as a unique code sent to a mobile device. This type of security prevents unauthorized access even if the password is compromised. Enabling 2FA on cryptocurrency exchanges and wallets reduces the risk of unauthorized transactions.
  • Secure Networks and Devices. A user engaging in a crypto transaction such as an exchange should use secure networks and devices. Public Wi-Fi networks and compromised devices can expose users to various security risks. These include man-in-the-middle attacks and malware. Platforms advise the use of trusted networks. Platforms typically encourage users to regularly update and secure devices with strong passwords and reliable antivirus software.
  • Phishing Attacks. Phishing attacks are a common threat in the cryptocurrency space. Attackers masquerade as legitimate entities like exchanges or wallet providers. They trick users into revealing private keys or login credentials. Users should verify the authenticity of websites and communication channels before sharing sensitive information. They should directly access websites through secure bookmarks. Another alternative is to manually enter a website's URL.
  • Smart Contract Audits. Smart contracts are self-executing agreements on blockchain platforms like Ethereum. They are susceptible to vulnerabilities and exploits. Auditing smart contracts before deployment helps identify and mitigate potential security risks. Code reviews, vulnerability assessments and third-party audits aid in ensuring the integrity and security of smart contracts. These methods protect users from financial losses.

Getting Started

  • Acquire and set up a digital wallet. A wallet is a software application or a physical device that allows users to securely store, manage and interact with cryptocurrency platforms. Typically, a wallet generates a pair of cryptographic keys, a public key for receiving funds and a private key for signing transactions. The user should keep the private key secure. This key provides access to their funds.
  • Choose a reputable wallet provider and follow best practices. These include enabling two-factor authentication, using strong and unique passwords and regularly updating wallet software. A user should consider hardware wallets. Such tools provide an extra layer of security by storing private keys offline and isolating them from potential threats.

Unique Aspects

  • Different security measures from traditional financial systems. One of the most common security measures is the use of cryptographic algorithms to secure transactions and control the creation of new units. The cryptographic layer ensures the integrity and immutability of the transaction history. The layer makes it difficult for malicious actors to tamper with the records.
  • The decentralized nature of cryptocurrencies. A network of participants called miners, or validators, verify and record cryptocurrency transactions for a platform. The work of the group rather than a single entity such as a bank reveals that the platform is decentralized. The lack of a centralized authority reduces the risk of a single point of failure. Decentralization makes the network more resilient to attacks.
  • Unique security concerns. The distributed nature of the network means that one or more attackers would need to control a significant portion of the network's computational power to launch a successful attack. One or more bad actors who gain over half of the control for the network could launch a 51% attack. It is easier to inflict a 51% attack on a small, less secure network.
  • Pseudonymous nature of cryptocurrency transactions. Transactions are recorded on a public ledger called the blockchain. The identities of the participants are often represented by cryptographic addresses. This pseudonymity provides privacy but can attract illicit activities. Users should understand the risks associated with revealing their identities. They should take precautions to protect their privacy.


  • Immutable Transactions. Cryptocurrencies employ blockchain technology, a decentralized and transparent ledger. The ledger ensures that transactions cannot be altered or tampered with once recorded. This immutability provides a high level of security. It eliminates the risk of fraudulent activities.
  • Encryption. Cryptocurrencies use advanced cryptographic techniques to secure transactions and wallets. Encryption algorithms protect sensitive data like private keys. They ensure only authorized individuals can access and control the digital assets.
  • Decentralization. Unlike traditional financial systems, cryptocurrencies operate on decentralized networks. There is no single point of failure. The decentralization enhances security by eliminating the vulnerability of centralized servers. It also reduces the risk of hacking or data breaches.
  • User Control. Cryptocurrencies give users full control over their digital assets. Users hold their private keys, which are required to access and transfer funds. This control minimizes the reliance on third parties. It reduces the risk of unauthorized access or asset seizure.
  • Transparency. Cryptocurrencies operate on public blockchains. Anyone can view and verify transactions. This transparency fosters trust among users. They can independently verify the integrity of the network and ensure transactions are valid.


  • Irreversible Transactions. Once a cryptocurrency transaction is confirmed, it cannot be reversed. If a user accidentally sends funds to the wrong address or falls victim to a scam, recovering the funds can be challenging or impossible.
  • Vulnerability to Hacks. Cryptocurrencies utilize robust security measures but not are not entirely immune to hacking attempts. Cybercriminals may target exchanges, wallets and individual users to steal digital assets. It is crucial for users to employ strong security practices. Examples of such practices include using hardware wallets and enabling two-factor authentication.
  • Lack of Regulation. The decentralized nature of cryptocurrencies means that they operate partly outside the control of traditional regulatory frameworks. Governments are moving to regulate systems to a certain extent. Decentralization offers freedom and privacy but can also expose users to scams, fraud and market manipulation. Minimal regulations or an absence of regulations gives users little protection. Such lack of oversight and control makes it hard for users to seek legal recourse and establish safeguards against fraud.
  • Complexity. The technical intricacies of cryptocurrencies can be overwhelming for newcomers. Understanding concepts like private keys, wallets and blockchain technology requires a learning curve. If users are not well-informed or make mistakes in managing their digital assets, they may compromise the security of their funds.
  • Human Error. Cryptocurrency security heavily relies on the actions and responsibilities of individual users. Human error like forgetting passwords can lead to irreversible loss of funds. Users must exercise caution, maintain backups and stay vigilant to protect their information and funds.