The popularity and surge in prices in Bitcoin and Ethereum means that virtual currencies often become a target for hackers that want to take advantage of these valuable assets. Tracking the work of hackers is often challenging since their footprints can be eliminated digitally. When a cryptocurrency account is hacked, investors do not have any recourse legally since the virtual coins are still unregulated by a government entity or central bank.
Even though the cryptocurrency industry has only achieved broader attention in the past decade, there is already a narrative that is so common as to be almost pedantic. An individual, or perhaps an entire digital currency exchange, is subjected to malicious hacks.
The result is that a large quantity of digital currency goes missing. The hackers seem to disappear into the void of the anonymous internet, never to be seen or heard from again. With them, they take a huge amount of money, stored away in digital assets that are impossible to trace or recover.
Learning how to properly secure your digital coins is considered to be a vital step as you journey down the cryptocurrency rabbit hole. In this guide, we’ll discuss some of the techniques for doing so.
As a brief explanation before we go deeper on crypto wallets, you should know that the essential distinction between crypto wallets is whether they are hot or cold.
A hot wallet is connected to the internet and can be accessed at anytime, a cold wallet is not connected to the internet and allows to store your funds offline. You can still receive funds at any time, but no-one can transfer them out.
Hot wallets vs. cold wallets
Hot wallets tend to provide the most seamless user experience. They are very convenient when it comes to sending, receiving, or trading cryptocurrencies and tokens. But this convenience often comes at the cost of security.
Hot wallets are inherently vulnerable because of their Internet connectivity. Though private keys aren’t broadcast at any point, there’s a possibility that your online device can be infected and remotely accessed by malicious actors.
The safety and security of a hot wallet are largely dependent upon the user’s behaviour. Any items stored in a hot wallet are vulnerable to attack because the public and private keys are stored on the Internet.
Experienced cryptocurrency investors will only keep a small portion of their holdings in their hot wallet because it’s less likely that a hacker will break into a hot wallet for a small number of tokens. For example, they may only keep the amount they plan to spend in the near future in their hot wallet. Their remaining assets will stay in cold storage until they are needed for specific transactions.
Unlike hot wallets, cold wallets do not connect to the internet therefore, they are not prone to cyberattacks. Storing your private keys in a cold wallet, also known as a hardware wallet, is the most viable option as these come encrypted, keeping your keys secure.
Hardware wallets and paper wallets are both cold wallet options. However, hardware wallets are more popular as they are easier to use and come with customer support provided by the manufacturer.
Hardware wallets use a physical medium — typically in the shape of a USB stick — to store the wallet’s private keys, making them de facto unreachable to hackers or other malicious parties.
To store crypto in your hardware wallet, you send it from a hot wallet to your hardware wallet’s public address. Conversely, if you want to send crypto from your hardware wallet to a friend or an exchange address, you connect your hardware wallet to the internet via the wallet’s dedicated software and then sign the transaction with your private key.
Paper wallets function in a similar manner as hardware wallets. However, instead of a physical USB-like device, paper wallets are pieces of paper that contain a public wallet address and a private key. Therefore, they have to be kept securely in a safe or somewhere where they cannot be easily found to avoid theft of your cryptocurrency.
To send coins from a paper wallet, the wallet has to be imported into a hot wallet via a scan of the private keys so the coins therein can be spent.
While cold wallets provide a superior storage solution in terms of security, the main drawback is that they are impractical for everyday crypto usage as it is more cumbersome to send crypto from a cold wallet.
What’s the best storage option?
Whether a hot or cold wallet is more suitable for you, this largely depends on your risk profile and how you use your cryptocurrency. For example, if you are an active swing trader, you will surely have different requirements than a long-term HODLer. Or, if you run an institution that handles large amounts, you’d probably want a multisignature setup, where multiple users need to agree before funds can be transferred.
For regular users, it’s a good idea to keep the funds you’re not using in cold storage. Hardware wallets are the most straightforward options – but make sure you test them out with small amounts to get comfortable first. You’ll also want to keep your keys backed up elsewhere, in case the device itself is lost or fails. Make sure that your backup is offline – some write their seed phrase down on a piece of paper and store it in a safe, while others stamp it into fire-proof metal.
Online wallets are great for small amounts that you’re using to buy goods and services. If your cold storage is like a savings account, your mobile wallet is like the physical wallet that you carry around. Ideally, it should be an amount that, if lost, would not cause you serious financial issues.
Regarding cryptocurrency storage, blockchain industry today provides many interesting options. Each alternative comes with its own benefits and drawbacks, so it’s important to understand the trade-offs. This way, you can get more comfortable using a combination of hot and cold wallets, according to your needs.
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