Obtaining or purchasing cryptocurrency is one thing, while storing it securely requires entirely different skills and knowledge.
This guide teaches you how to protect your funds, choose the right wallet, and avoid the most common risks of digital currencies.
What is a cryptocurrency wallet.
A cryptocurrency wallet is a software program designed to store your public and private keys, send and receive digital currencies, monitor your balance, and interact with multiple blockchains. You need a cryptocurrency wallet to manage your crypto assets and keep them safe.
There are many cryptocurrency wallets out there, but the main difference between them is whether they are hot or cold .
- One hot wallet is connected to the internet and can be accessed at any time.
- One cold wallet is not connected to the internet and allows you to store your funds offline. You can still receive funds at any time, but no one can transfer them.
Hot wallets include all online cloud wallets, most mobile and software wallets, and exchanges.
Cold wallets they are portfolios of hardware, paper wallets held offline, similar offline and USB data storage devices, and even physical bearer items such as physical Bitcoins.
Most cryptocurrency holders use both cold and hot wallets. Hot wallets are useful for frequent trading, while cold wallets are better for holding digital assets for the long term.
But before we explore different wallets, here’s a quick reminder of why keeping your digital assets on exchanges is generally not a good idea.
Types of Cryptocurrency Wallets
There are four distinct categories of cryptocurrency wallets: paper , hardware , cloud and online . Let's take a look at each of them.
Paper wallets
Paper wallets are generally classified as insensitive storage. The term “paper wallet” usually refers to a physical reproduction or paper record of your public and private keys. Other times, it means software used to generate a key pair along with a digital record for record. Whatever the case, paper wallets can promise a relatively high level of security. You can import your paper wallet into a software client or simply scan its QR code to move your funds.
If a paper wallet is available for your cryptocurrency of choice, you can likely find a guide on how to make one on the project's website or community page. MyEtherWallet is a universal way to make a paper wallet for Ethereum and all ERC-20 tokens. Use Bitcoin Paper Wallet Generator to generate a paper wallet for Bitcoin.
While paper wallets are cool, they also come with their fair share of risks. For example, paper wallets can be easily damaged, burned, easily copied and photographed, and require mutual credit if you don’t make one yourself. To make paper wallets less fragile, people sometimes laminate them, create multiple copies and store them on different websites, engrave them on pieces of metal or other sturdy materials, etc.
Please note that it is not a good idea to keep electronic copies of your paper wallet on your PC. The paper wallet private key should always be kept offline. Keeping your paper wallet files online makes them as secure as a hot wallet.
Cloud Wallets
Online wallets are all the rage by definition. Using a cloud wallet, your funds can be accessed from any computer, device, or location. They are super convenient, but they store your private keys online and can be controlled by third parties. Therefore, they are more vulnerable to attacks and theft by design. Popular cloud wallets include:
- Coinpayments
- Coinbase
- Metamask
- Blockchain.info
Software wallets
Software wallets are downloaded and installed on a personal computer or smartphone. They are hot wallets. Both desktop and mobile wallets offer an eminent level of security; however, they cannot protect you from hacks and viruses, so you should try your best to stay malware-free. As a rule, mobile wallets are much smaller and simpler than desktop wallets, but you can easily manage your funds using both. Additionally, some software wallets allow you to access funds across multiple devices simultaneously, including smartphones, laptops, and even hardware wallets.
- Jaxx
- Freewallet
- Exodus
- Electrum wallet
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Hardware Wallets
Unlike software wallets, hardware wallets store your private keys on an external device like a USB. They are completely cold and secure. In addition, they are capable of making online payments. Some hardware wallets are compatible with web interfaces and support multiple currencies. They are designed to make transactions easy and convenient, so all you need to do is plug it into any online device, unlock your wallet, send currency, and confirm a transaction. Hardware wallets are considered the most secure means of storing digital assets. The only downside is that they are not free.
Popular hardware wallets include devices by:
- Ledger Nano S
- Keepkey
- Coollwallet
- Trezor
Getting a hardware wallet directly from the manufacturer is the safest way. It is not safe to buy it from other people, especially those you do not know. Remember that even if you get a hardware wallet from a manufacturer, you should always initialize and reset it yourself.
Security best practices to prevent your private keys from being stolen
So you’ve decided to take control of your virtual assets and keep everything in a private wallet. Quite the accomplishment! However, with great power comes great responsibility, and now it all depends on your ability to stay safe and keep your private keys private.
The most common security steps to follow are:
- Do not store cryptocurrencies on exchanges for an extended period or longer than necessary.
- Always enable the two-factor authentication (2FA) function.
- If you choose a hardware wallet, choose a PIN code that is difficult to guess and never post your 24-word recovery sheet online.
- Do not brag about your cryptocurrency assets publicly under your real name or identifiable address. Some thieves can steal virtual funds even if you keep them in insensitive (offline) storage.
- Trust only what you see on the hardware wallet screen and verify all information on the device.
- Always assume that your devices could be compromised at any time, so always treat your computer or smartphone screen with care.
Or, follow these tips to minimize the chances of losing your coins.
Be aware of phishing sites. Whether you are logging into an exchange or an online wallet, make sure you are logging into the correct address. Many fake websites imitate exchanges with the sole purpose of stealing your login details. Always double-check that the website address is correct.
HTTPS. Only log in to secure sites with a valid HTTPS certificate. Most legitimate sites have one. For extra security, try browser plugins like “HTTPS Everywhere.”
Use a secure Wi-Fi connection. Never connect your online wallet, exchange account, or other security-critical point via public WiFi. Even when you’re in a presumably secure location, make sure your WiFi gateway uses a strong encryption protocol, such as the WPA-2 protocol.
Separate your funds. Don’t keep all your virtual assets in one place. The best way to deal with this is to use one or more cold storages for long-term assets and at least one hot wallet for trading and transactions.
Two-factor authentication. Always protect your accounts with 2FA. Whenever possible, use software or hardware 2FA tools instead of SMS.
Whitelist IP and drop addresses. If you have a static IP address, use it for your security. Make sure that only you can access your accounts and funds.
Please double check the crypto addresses. Some malware can edit and paste an incorrect transaction address every time you send a transaction. Usually, the new address belongs to an attacker. It's better to stay safe than regret.
Use security measures that you can control. Some people never feel safe and do everything they can to secure their cryptocurrency. However, they forget that they can also lose cryptocurrency to their security tools. Losing access to your accounts, funds, or wallets is as common as hacks. Don’t complicate your security if that’s not what you like anyway. Strive for a suitable balance between difficulty and security.
The art of keeping your cryptocurrency safe and secure is a crucial skill to master on your journey to becoming your own bank. The sooner you learn, the better.