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Just like you need a wallet to protect your money and credit cards, you also need to know where you are going to store your crypto.
When you buy digital currency on a trading platform or exchange, you may have the option of leaving the keys to your coins in the account which is a form of storage. But you can also move them from the platform to a personal crypto wallet, which can be internet-connected software (a hot wallet) or a completely offline device (cold storage).
Here’s what you need to know about cryptocurrency wallets and how to decide which storage option is right for you:
What is a cryptocurrency wallet?
Since a regular wallet stores physical currency when you are not using it, a cryptocurrency wallet is a place to store your digital currency.
In reality, all you need to transact in crypto are two things: your wallet address, which is also called your public key, and then your private key, says Nicole DeCicco, founder of CryptoConsultz, a firm of advice for individuals and organizations new to crypto and blockchain. Technology.
A public key is like your bank account number. You can share it with other people or institutions, so that they can send you money or withdraw money from your account when you authorize it. These people usually think of your public keys as a wallet address, a hashed or more compressed version of that public key.
But a private key is like your bank account password or your debit card PIN. You wouldn’t want to give it to me because that would give me access to your account, DeCicco said.
As a purely digital currency, crypto is not directly held in your wallet; instead, the wallet stores information about your public and private keys, which is equivalent to your stake in crypto. Using these keys, you can send or receive cryptocurrency while keeping your private key encrypted.
Types of crypto wallets
Different crypto storage options can serve different purposes, depending on what you plan to do with your crypto. Long-term Bitcoin investors, for example, who plan to hold it for a period of time as a store of value may want the security of an offline cold storage wallet. On the other hand, those who are more involved in crypto transactions may wish for the convenience and speed that a hot online wallet can offer.
Hardware portfolio
These are sometimes referred to as cold wallets or cold storage, and they store your keys completely offline on a device that is not connected to the internet. Many popular cold wallet devices look like a USB flash drive. Sometimes paper wallets where you print information about your public and private keys on a sheet of paper are even used as cold storage.
Crypto enthusiasts often regard cold storage as the gold standard for protecting your digital assets. Because they are offline, hardware wallets are the most difficult type of wallet to hack. But that doesn’t mean that there aren’t any risks yet.
On the one hand, hardware wallets can be easily lost or misplaced. How many times have you ever lost a USB drive with nothing more than documents? That alone is not practical. But losing a device that holds the keys to your investments that are irrecoverable once gone can be a financial blow.
Even hacking can still be a problem. If you choose the cold room, DeCicco recommends that you buy a device directly from the manufacturer, rather than second-hand. If you buy from a third party, you risk being tampered with by a hacker who may have bought, compromised, and repackaged it for sale.
Software portfolio
These can also be called hot wallets. If you think of a hardware wallet like the wallet that you could keep in your purse, you can think of a software wallet like your online bank account.
They’re often linked to an exchange, they’re often user-friendly, and they’ve really opened up the space to a more mainstream market, DeCicco says. But there are many risks in keeping your funds online.
Hot wallets can take different forms. You can access it through the crypto exchange that you use to buy your coins, download software to your computer’s desktop, or even use a smartphone app. But because each of these options leaves your public and private keys connected to the internet, you may face a higher risk of hacking than if you are using cold storage.
Do you need a wallet?
Technically, you don’t need to keep your coins in a cold store or download a hot wallet program to your desktop. Many crypto exchanges allow you to store your cryptocurrency in a wallet on the exchange, and some people leave it at that.
But is it okay to keep your crypto in the wallet provided by an exchange like Coinbase or Kraken?
Crypto purists will say no, says Tyrone Ross, financial advisor and CEO of Onramp Invest, a crypto investment platform for financial advisers. But there is a learning curve when it comes to cryptography, and until you have a solid understanding of public and private keys, hot and cold storage, and other crypto security topics, you’re good to go. Until you learn all of this, you can leave your coins on Coinbase, or Gemini, or whatever.
The goal is not to rely on that option, he says, and possibly move your crypto to your own form of storage, but these are exchanges that have gone beyond security and backup. Your crypto is not protected by any regulatory body like money in a bank is, but in addition to security measures, many reputable exchanges like Coinbase and Crypto.com offer insurance coverage on crypto holdings. and even use cold storage methods themselves. In the event that your crypto has been stolen by hackers or the exchange has failed, this is another added protection for your investment.
However, the risk of piracy remains. Last year, KuCoin (the fifth largest exchange by volume, according to CoinMarketcap) suffered a hack worth over $ 200 million. While user funds have been recovered, it highlights the risk that any exchange can carry just like traditional financial institutions.
A hot wallet has a similar level of security as your bank account, says Kiana Danial, author of Cryptocurrency Investing for Dummies and creator of @Investdiva on Instagram. Exchanges generally take their security practices seriously and often have insurance to safeguard their security in the event of an attack. But the tradeoff is how much control you have over your own cryptocurrency.
Danial equates this to your bank’s ability to simply freeze your account. And within a community built on decentralization and a maxim of no your keys, not your coins, relying on a centralized entity (the exchange) to control the keys to your crypto can be seen as a security risk. in itself. DeCicco cites as an example the outages reported by account holders during the most recent dramatic drop in the crypto market.
Almost all trading has gone down, just when it’s so important that you have the ability to buy or sell cryptocurrency, she says. You don’t always have this option if you keep your funds in an exchange.
How to choose the right crypto wallet
When choosing a storage option for your crypto, you should assess your risk tolerance and goals, as well as your level of crypto knowledge. If you want to keep your coins for the long term and don’t plan on trading, cold storage may make the most sense. But if you are a newbie and are generally careful about how much you invest, you might prefer the simplicity of being able to buy and hold your coins in an exchange.
We advise people to go to the source and make their own decision on how to engage and where after doing their homework, says Eva Velasquez, president and CEO of the Identity Theft Resource Center. Don’t rely on options you see advertised or get solicited for in your inbox. After they do some research, is this a legitimate exchange, are they real companies that offer the storage options?
When it comes to specific options, it makes sense to stick to the same rule of thumb as choosing a coin to invest in or an exchange to trade on the most common options, the most popular are usually the ones. that present the least risk.
I place a lot of importance on the longevity of the platform or device, says DeCicco. You might have loopholes in the software’s security, and this is where hackers can enter. If you have a proven wallet, it’s more reliable for their security team to keep abreast of the latest security practices.
Personal account security
Like any type of online account, the active security measures you take can also make a big difference in protecting your crypto.
If you are unaware of and committing to best practices for good basic cyber hygiene, Velasquez says, highlighting practices such as updating devices, managing network security and l ‘using multiple passwords, you might want to consider practicing this before you decide to dive into something new like getting involved in crypto.
Here are a few things to keep in mind:
If your wallet works with software, update it frequently and do not continue to use older versions of the software. Go for two-factor authentication and make sure that any hot exchange or wallet program that you use offers as an option. Do not share your private key with anyone, just as you would not share your social security number or your debit card PIN. Keep strong passwords that you update regularly and don’t use the same password for multiple accounts.
We hear a lot about hacking, DeCicco says. But even though hacking is a real risk, I work with so many clients every day who have been their worst enemy.
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