So, you’re seriously thinking about buying some cryptocurrency. Great! Maybe you haven’t pulled the trigger yet because you have security concerns due to events like Mt. Gox. This post will explain everything you need to know about securing your funds for years to come. First, let’s start with the basics.
What’s a Crypto Wallet?
Much like your physical wallet, many wallets can hold multiples coins, and most coins have an official wallet of their own.
Pay attention. This is an important concept that is often misunderstood: coins are not actually stored on the blockchain. Instead, the blockchain consists of transactional records that detail which address has control over the funds.
Each wallet has an address associated with it that can be viewed on the blockchain. This address functions similarly to a bank account number.
There is no harm in sharing your address with the world because it’s a cryptographic code and contains no personal information. Anybody can send funds to your wallet by using that address.
No two wallet addresses are ever the same, meaning that there is no chance that your funds will be sent to the wrong person. Additionally, there’s no limit to the number of wallet addresses you can create.
This is one of the wallet addresses of Satoshi Nakomoto, the anonymous founder of Bitcoin: 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa.
Since most blockchains are public, we can view that address by using a blockchain explorer. Finding the balance of a particular wallet and all of the transactions it has been involved in is relatively easy. Blockchains are often referred to as “pseudonymous” because the user’s identity is revealed.
Wallets have both a public and a private key associated with them. The public key is a cryptographically hashed version of your address, and to withdraw the funds in a wallet, you must input the private key.
Your private key is the only way to prove you’re the owner of a wallet in the eyes of the blockchain. It’s imperative that you keep your private key hidden, because whoever has the private key can access all your funds.
Let me say that again because it’s the biggest takeaway from this post: Not your keys, not your crypto.
Hot vs. Cold Storage
There are many different types of wallets, and which one you choose depends on your needs. Some wallets are more secure, while others are more practical. I have found using multiple wallets to be the most effective for me.
The first thing you should consider is how often you need to access your funds.
Wallets are usually categorized into either hot or cold storage, with hot storage being the most popular.
- Hot wallets are connected to the internet and can be accessed at any time. This includes most mobile apps, cloud wallets, and exchanges.
- Cold wallets are not connected to the internet and store your funds offline. You can receive funds at any time, but they can not be withdrawn until the wallet is online again.
It’s best to use both cold and hot wallets because hot wallets are handy for frequent trading, and cold wallets are better for holding assets long-term.
Keeping your funds in the wallet provided on an exchange is the least secure way of storing your money. (Like I said earlier, not your keys, not your crypto.) If someone hacks the exchange, you will likely lose your funds due to the hackers having your private key.
Types of Wallets
There are three major types of wallets: hardware, software, and paper. The main differences between them are how they store your private keys. Remember that your coins are not physically stored on the blockchain.
- Software wallets are the most common type of cryptocurrency wallets because they can be accessed at any time and are generally free to use. Some software wallets allow you to access funds via multiple devices simultaneously, including smartphones, laptops, and even hardware wallets.
- Hardware wallets are cold storage devices that store your private keys on an external device like a USB. They use a random number generator to create public and private key pairs and require physical confirmation before transferring funds. Hardware wallets are considered the safest means of storing crypto assets but can be inconvenient for people who frequently need access to their funds.
- Lastly, paper wallets are sheets of paper that have public and private keys printed on them. Sometimes software is used to generate a pair of keys and a digital file for printing in the form of a QR code. The most significant tradeoff with paper wallets is that they can be easily damaged, burned, lost, or replicated. To address paper wallets’ fragility, some users will laminate them, create multiple copies to store in different locations, or even inscribe the keys into metal or rock.
With great power comes great responsibility. Cryptocurrencies have ushered in a new wave of finance and technology, which places a lot of responsibility on the individual to keep their private keys secure.
These are the steps I urge you to take:
- Withdraw any assets from exchanges if you are planning to hold long-term.
- Enable 2FA every opportunity you get. If possible, use a tool like Google Authenticator rather than SMS.
- If using a hardware wallet, choose a pin code that is hard to guess, and never put your 24-word recovery sheet online.
- Assume that your devices can be compromised at any time, so always treat your computer or smartphone with caution.
Additionally, here are some tips from a seasoned veteran:
- Phishing sites run rampant in the crypto community, so always triple-check that the website URL is correct. Many bogus websites imitate exchanges for the sole purpose of stealing your login data.
- Never connect to your online wallet or exchange account via public WiFi. Even when you’re at a presumably safe place, make sure you’re using a VPN or that your WiFi access point uses strong encryption like WPA-2 protocol.
The moral of the story: Don’t keep all your eggs in one basket. The best way to go about using cryptocurrency is by using multiple cold storage wallets for long-term holdings and at least one hot wallet for trading and frequent transactions.