Do Cryptocurrency Wallets Keep Your Investment Safe?
Just as you need a wallet to protect your cash and credit cards, we also need to know where to store our cryptocurrencies.
When you buy digital currency on an exchange or trading platform, you may have the option to leave the “keys” of your cryptocurrency in your account. But you can also move them outside the platform to a personal crypto wallet, which can be internet-connected software (hot wallet) or a completely offline device (
Cold Wallet
).
Here’s what you need to know about cryptocurrency wallets and how to decide which storage option is right for you:
What is a Crypto Wallet?
Just like storing physical money in a regular wallet,
a cryptocurrency wallet
is a place where you can store our digital currencies.
Nicole DeCicco, who provides advice to individuals and organizations learning about cryptocurrencies, says, “Really, there are two things you need to transact with cryptocurrency; your wallet address, also known as your public key, and then your private key.”
A public key is like your bank account number. If you authorize it, you may share it with other people or entities so that they can send you money or withdraw money from your account. People think of their public key as a wallet address, and their private key as another compressed or encrypted version of themselves.
But the private key is like your bank account password or debit card PIN. “You don’t want to give me your password because that would allow me to access your account,” DeCicco says.
As a purely digital currency, cryptocurrencies are not held directly in your wallet; Instead, the wallet stores information about your public and private keys that corresponds to your ownership interest in crypto. These keys allow you to send or receive cryptocurrency while your private key remains encrypted.
Types of Crypto Wallets
Different crypto storage options can serve different purposes depending on what you plan to do with your cryptocurrency. For example, long-term Bitcoin investors who don’t want to use Bitcoin for a while may want the security of an offline cold storage wallet. Those who are more interested in active crypto transactions may want the convenience and speed that an online hot wallet can offer.
1-) Hardware Wallets
Sometimes called cold wallets or cold stores, these store your keys completely offline on a device that is not connected to the internet. Many popular cold wallet devices have a similar appearance to a USB device. Paper wallets, where you sometimes print information about your public and private keys on a piece of paper, are even used for cold storage.
Cryptocurrency enthusiasts often consider cold storage to be the gold standard for protecting their digital assets. The most difficult type of wallet to hack is hardware wallets, as they are offline. But that doesn’t mean there aren’t risks.
For one, hardware wallets can easily get lost due to the fact that they are portable. Losing a device that holds the keys to your investments and can’t be recovered once lost can mean a huge financial loss.
Even piracy can still be a problem. If you choose to store your asset in a cold wallet, it is recommended that you buy the hardware directly from the manufacturer instead of buying it second-hand. If you buy from a third party, you run the risk of a hacker tampering with the device, compromising it, and repackaging it for hacking.
2-) Software Wallet
These can also be called hot wallets. You can think of your wallet in your pocket as a hardware wallet, and your software wallet as your online bank account.
“They’re usually tied to an exchange, they’re usually easy to use, and they’ve really paved the way for a mainstream market,” DeCicco says. But there are many risks to keeping your money online.
Hot wallets can take different forms. You can access it through the crypto exchange, which you use to download a software program to your computer’s desktop and even use a smartphone app. However, since any of these options keep your public and private keys connected to the internet, your risk of being hacked may be greater than using cold storage.
Do You Need a Crypto Wallet?
Technically, you don’t need to store your cryptocurrencies in cold storage or download a hot wallet program to your desktop. Many cryptocurrency exchanges allow you to store your cryptocurrency in a wallet on the exchange, and some people leave it there.
But is it okay to keep your cryptocurrency in a wallet provided by an exchange?
Your cryptocurrency isn’t protected by a regulator like cash in the bank, but in addition to security measures, many reputable exchanges offer insurance coverage for cryptocurrencies and even use cold storage methods.
Kiana Daniel says that a hot wallet has a similar level of security to your bank account. Exchanges usually take their security practices seriously and often have insurance in place to ensure their security in the event of an attack.
How to Choose the Right Crypto Wallet?
When choosing a storage option for your crypto, you should evaluate your level of crypto knowledge as well as your risk tolerance and goals. If you want to store your cryptocurrencies for a long time and don’t mind trading, cold storage may make more sense. But if you’re a beginner and generally cautious about how much you’re investing, you may prefer the simplicity of buying and holding your cryptocurrencies on an exchange.
Eva Velasquez, President and CEO of the Identity Theft Resource Center, said, “We encourage people to go to the resource and make their own decisions about how and where to participate after doing some research.”
When it comes to specific options, it’s wise to follow the same general rule when choosing a currency to invest in or an exchange to trade: the most popular and traditional options are usually the least risky.
Personal Account Security
As with any online account, the active security measures you take can make a big difference in the security of your crypto.
You need to pay attention to practices such as updating devices, managing network security, and using multiple passwords.
Here are some tips to keep in mind and implement:
- If your crypto wallet is software-based, please update it regularly and do not use older versions of the software.
- Use two-factor authentication, make sure the hot wallet program offers you this as an option.
- Do not share your private key with anyone.
- Use strong passwords that you update regularly, and don’t use the same password for multiple accounts.
