Love it or hate it, the crypto market is booming. And it likely won’t go away. While it is already risky enough to invest in such a volatile market, it is also necessary to safely store those digital assets. Because as the value of the cryptocurrencies keeps rising, it becomes a bigger and more attractive target for hackers. And you must do everything possible to ensure your crypto assets are safely stored.
Being your own bank, storing and managing your digital currency doesn’t have to be confusing if you are a beginner. Learning how to properly secure your digital assets is a vital step in your crypto journey. In this article, we’ll talk about what wallets are and how they work, as well as the different kinds of wallets out there. You’ll then be able to pick the best options for your strategy and secure your funds properly. Lastly, I’ll go over some important tips on how to safely navigate the crypto space.
It's not a physical wallet. In its simplest form, a cryptocurrency wallet is a tool that stores your public and private keys. Every crypto wallet is made of a public key and a private key. We’ll get into what those are in a second.
A piece of paper with your public and private keys written on it serves as a crypto wallet. And on the other end, we have more complex software that integrates with crypto services to lend and stake your crypto, facilitates transactions with decentralized exchanges, besides safely storing your keys.
Each blockchain is built using different technology, therefore the wallets for each blockchain are different and not interchangeable. An Ethereum wallet can only accept Ether and tokens created on the Ethereum blockchain. The same holds for other blockchains, like Bitcoin, Bitcoin Cash, Litecoin, Dogecoin, Dash, etc.
A public key, also called the wallet address, is the address you share with others so they can send crypto to you. It is anonymous since personal identification is not tied to an address unless divulged. But at the same time, it is public. Everyone can see it, find out which transactions this wallet participated in, and send crypto to this wallet.
A Bitcoin public key looks like this: bc1qar0srrr7xfkvy5l64...nw9re59gtzzsf4mdq.
What is a private key?
A private key is used to control the funds in your public key. Anyone with your private key can access the funds in your wallet, and therefore your private key should never be shared with anyone. Most importantly, if you lose your private key, you’ll lose access to your funds.
Now, you might be asking yourself if someone can’t just guess your private key and steal all the funds in the wallet. While that’s possible, the chances of guessing correctly are effectively zero. A private key is made of 256 bits, that’s a number between 0 and 2,256. It is often written as bytes in hexadecimal, reducing it to 64 characters between 0 and 9 and between A and F. That’s a number greater than the estimated atoms in the universe. Someone trying to brute force and guess a private key would’ve made more money using that computational power mining the cryptocurrency.
A Bitcoin private key looks like this: E9873D79C6D87DC0FB6A57...4453213303DA61F20BD67FC233AA33262.
What is a seed phrase?
A seed phrase and a private key is functionally the same. A seed phrase is derived from a private key and written as English words for easier handling. It is typically 12 or 24 words long.
When creating a new wallet, you’re often asked to write words down, instead of a private key, to have a backup of the wallet. If you lose your device or your hard drive crashes, you can still access your wallet if you have the seed phrase to recreate it. Therefore it is good practice to have at least two copies of your seed phrase, stored in different locations, and kept safe.
A seed phrase looks like this: witch collapse practice feed shame open despair creek road again ice least
How do cryptocurrency wallets work?
Contrary to popular belief, crypto wallets don't truly store cryptocurrencies. Instead, they store the public and private keys and often have a user interface so you can interact with different blockchain technology. If you lose your crypto wallet, you can either buy a new one or restore it, as long as you have the seed phrase or private key backed up.
To receive coins and tokens, all that is needed is to share the public key (also called address) for the wallet on the desired blockchain with the sender. And to send coins, once the receiving address is known, you can set the transaction up with the desired amount to send. Additional functionalities of a crypto wallet can vary widely, so let’s get into the different wallet types.
Now that you know about private keys, public keys, and seed phrases, let’s talk about the different types of wallets. Wallets come in many forms: mobile apps, desktop software, hardware, paper, etc. Each with different security considerations. All these forms are divided into two overarching categories: hot and cold wallets.
Cold (offline) wallets are considered the most secure way to store your crypto, as these wallets are not accessible via the internet. Instead, your keys are stored on a medium or device offline, making them resistant to hacking attempts. If your computer gets compromised through a virus or a hacker, your crypto is still safe, since hackers would need physical access to your wallet. A cold wallet works best when holding crypto long-term.
Hot (online) wallets are more convenient since you can easily access and trade with them, making them optimal for traders and frequent users. The downside is they are connected to the internet at all times, therefore more vulnerable to hackers and not as secure as cold wallets. It’s best not to leave large amounts of capital in a hot wallet.
Browser wallets are either browser extensions or websites that function as crypto wallets. The best-known browser wallet is Metamask. It makes life way easier when using Dapps (decentralized applications) and DeFi (decentralized finance), such as decentralized exchange Uniswap. Being connected to the internet makes transacting with browser wallets quick and easy.
Desktop and mobile wallets
Also called software wallets, desktop and mobile wallets are downloaded and installed on a personal computer or mobile device using your preferred operating system. Both desktop and mobile wallets offer a high level of security; however, they cannot protect you against security breaches, hacks, and viruses, so you should try your best to stay free from malware and viruses. As a rule, mobile wallets are way smaller and simpler than desktop wallets, but you can easily manage your funds using both of them. Some popular software wallets include Electrum, Exodus, Mycelium, Trust Wallet, and MyEtherWallet.
Crypto exchange wallets
Out of convenience, many crypto investors and enthusiasts leave their coins on an exchange like Coinbase or Binance. Those exchanges then store the coins in their hot wallets used for deposits and withdrawal, or on cold wallets for so-called cold storage. However, cryptocurrency exchanges do not provide SIPC or FDIC insurance. The popular expression “not your keys, not your coins” is often repeated when people mention their coins are on an exchange. If an exchange is hacked or disappears, the coins are gone. Billions have already been stolen from exchanges, the Mt. Gox hack being the most famous example, wherein in 2014 over 850,000 BTC were stolen. Therefore, it is wise to only leave funds in exchange if it’s needed for trading.
Hardware wallets are generally viewed as the most secure storage option, isolating private keys from the internet by keeping them offline in a USB-connected device and giving holders full control of their crypto. There is a trade-off in usability, however, since hardware wallets need to be used in conjunction with a hardware device connected to the internet, like a computer or smartphone, to send funds. In addition, you must also confirm transactions on the device, giving you a second layer of protection before transactions are broadcasted to the blockchain.
There are several hardware wallets available on the market, each with its own features and supported cryptocurrencies. Popular hardware wallets include devices by Ledger, Trezor, and Keepkey.
When you buy a hardware wallet, beware of any already given seed phrase. A popular scam is to buy a hardware wallet, create a seed phrase and send it with the wallet when reselling it, expecting the victim to deposit funds onto it which are then stolen. Instead, the best practice is to reset the wallet and create a new, unique seed phrase before transferring funds to it. Getting a hardware wallet directly from a manufacturer is the most secure way.
Paper wallets are the most simple form of cold storage and are simply a public and private key handwritten or printed on a piece of paper. When printed, they often include QR codes that can be scanned to execute transactions. The public and private keys are created online or offline, using a paper wallet generator on a website or by downloading software. Often, copies of such a paper wallet are created, laminated, and stored at different locations or given to different people for safekeeping.
Paper wallets come with their share of risks, too. For instance, paper wallets can be easily damaged, burned, easy to copy and take pictures, and require mutual trust if you're not making one yourself. A solution to this is to engrave them in pieces of metal or to buy indestructible steel wallets to store your private key or seed phrase.
Pros and cons
Type of wallet
Easy to use and interact with decentralized applications and exchanges.
Always connected to the internet, often only protected by a password.
Easy to use and store several cryptocurrencies.
Always connected to the internet, often only protected by a password.
Ideal for traders and users who need the tools offered by exchanges, such as futures and leveraged trading.
You don’t own the keys to the wallet, leaving the funds susceptible to hacks.
Physical access to the wallet is needed to execute transactions, making it very safe.
They cost up to hundreds of dollars, and transferring coins takes more time and effort.
Compared to hardware wallets, paper wallets are free.
Easy to get destroyed or lost. Only hold one cryptocurrency type per wallet.
Best practices to keep your crypto assets safe
Now that you know everything about crypto keys and the different types of wallets you can use to store them, let’s talk about the best practices to keep your crypto secure. This is a list of actions and behaviors to avoid getting hacked and losing all your funds.
Only use trusted exchanges: when picking an exchange to buy, sell, and trade crypto on, only work with reputable exchanges with security features. Look for exchanges with excellent reviews and that are well known and trusted within the crypto community. Coinbase, Binance, and Kraken are a couple of the most reputable exchanges.
Use strong, unique passwords: Never reuse passwords across your accounts, especially since cryptocurrency services are prime targets for hackers. It’s recommended that these passwords contain at least 16 characters. A password manager can make this process easier and faster.
Use multiple wallets: Don’t keep all your crypto assets in one place on a multi-currency wallet. The best way to handle it is by using one or several cold storages for long-term holdings, and at least one online wallet for trading and transactions.
Double check before sending crypto: Some malicious programs can edit and paste a wrong transaction address whenever you send a transaction. Typically, the new address belongs to an attacker. It’s better to be safe than sorry.
Activate two-factor authentication (2FA) whenever possible: You should always enable two-factor authentication (2FA), it adds a second layer of security to your account. Ideally, use an app like Google Authenticator instead of SMS codes, as SIM card swapping is a common attack vector.
Always use a VPN when using public WIFI: If you have to use public WIFI to access your crypto, always use a VPN to keep your traffic encrypted. Ideally, only access your crypto assets when using a private or secured network.
Keep your holdings private: Try not to be too vocal about your holdings in public. The less people know about your digital assets, the better it is for your security. You never know who is watching or reading your public content and they may target you because they know there is something to be stolen.
Don't fall for giveaway scams, phishing, fake websites: Don’t ever fall for offers sounding like “send us one Bitcoin and get two Bitcoin back.” This type of attack is quite common on Twitter, with attackers frequently impersonating celebrities, politicians, or crypto personalities. The same goes for fake websites and emails.
Have a backup of your private keys/seed phrase: Losing access to all your holdings can be soul-crushing. So it's important to back them up and keep them in different locations, in case of a fire or similar damage.
Should I use a crypto wallet?
The only way not to use a crypto wallet is to keep your coins in an exchange. Leaving coins on an exchange comes with its risks, and it is not necessary to use a crypto wallet. Still, it is highly recommended to use one and manage and store your coins yourself.
I lost my hardware wallet, is my crypto gone?
If you have a backup of the seed phrase, you can just buy a new hardware wallet, and restore your wallet using the seed phrase.
What types of crypto wallet are the best for me?
It depends on how active you are with your crypto assets, how big your portfolio is, and how tech-savvy you are. Often, crypto assets are stored on an exchange for trading, a hot wallet to interact with DeFi, and a hardware wallet for long-term holding.
The bottom line
Cryptocurrency keeps bringing a lot of innovation to the world, including some very specific and unique challenges around safeguarding our assets. It becomes necessary to rethink how you manage your money. You become your own bank, with all the associated advantages and disadvantages. Perhaps, over time, the tools and knowledge will be developed to better track thieves and discourage theft in the first place.
For now, keeping your crypto assets safe essentially boils down to how secure your private key (or seed phrase) is. By implementing the best practices above, you can significantly reduce the chance of your funds being compromised. Ultimately, the amount of security you wish to employ depends on your individual risk preferences and usage profile.
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