It’s fair to say that cryptocurrency exchanges are prone to hacking and scandals!
For example:
In addition to exchanges being prone to hacking, the prevalence of cryptocurrency scams and the lack of consumer protection give extra reasons why a cryptocurrency wallet is strongly recommended to any crypto user.
A wallet stores the public and private keys enabling you to receive and send cryptocurrency and view your holdings.
Public and private keys are a key feature of blockchain that allows users to send and receive cryptocurrency at any given time or place without requiring third-party verification. The two fit together as a key pair.
Public keys - like an email address. Public keys aim to prove ownership of an address that can receive funds. Public keys can be shared freely,
Private keys - like a password. Private keys are a randomly produced sequence of numbers and letters that enable you to spend cryptocurrency. It is important to back up your private keys because they are unrecoverable if lost. Private keys must be kept secret.
Since public keys need to be shared but are too big to be easily remembered, they are stored on digital certificates for secure transport and sharing. Since private keys are not shared, they are simply stored in the software or operating system you use or on a hardware wallet.
The sending of cryptocurrency from one wallet to another is essentially the ownership of the cryptocurrency changing from the sender's wallet address to the receiver's wallet address. In the process, the sender's balance will go down, and the receiver’s will go up.
Crypto wallets are somewhat similar to being bank accounts for your crypto, however, unlike traditional wallets, they do not hold any physical currency. The holdings held in crypto wallets are made up of transaction records stored on the blockchain.
Here are the multiple types of wallets available:
The most secure choice. Cold wallets are non-custodial, meaning that you are the owner of (and therefore responsible for) your private keys. The private keys usually comprise an 18 to 24 random word sequence.
Cold wallets are offline, meaning you are not dependent on internet connectivity. However, you will need to connect it to the internet when wanting to make a transaction. Cold wallets include hardware and paper wallets:
Hardware: these wallets store your private keys on a hardware device such as a drive or a USB (show below). Examples include Ledger Nano X, Trezor Model T and Satochip. Hardware wallets are offline, meaning you are not dependent on internet connectivity. However, you will need to connect it to the internet when wanting to make a transaction. Because they are offline, hardware wallets have greater levels of security than online wallets.
Not all hardware wallets are compatible with all cryptocurrencies. As a result, the hardware wallet best suited for you depends on the cryptocurrencies you are looking to store - check this with the wallet provider before buying!
To transfer cryptocurrency to your hardware wallet, you’ll need to transfer it from a hot wallet to the cold (i.e. hardware) wallet's public address. Hardware cold wallets come with dedicated software to enable you to transfer peer-to-peer. To transfer, plug your hardware wallet into an internet-enabled device, type out their pin and then send away!
Example hardware wallet. Source: Forbes
Paper: these have your private keys and public address written on, you guessed it, paper! Paper wallets are very secure, and straightforward, but easier to lose or destroy. Don’t put your cold wallet through the washing machine! To send from a paper wallet, you must transfer funds to a hot wallet via a scan of the private keys with your mobile phone.
Paper wallet example. Source: Anethabitcoin
Alternatively, to send to a paper wallet, you must transfer funds from a hot wallet to the paper wallet’s public address.
A cold wallet's limitation is its practicality, so probably not the best choice for those who do not want to ‘HODL’ for a lengthy period.
You can find cold wallet recommendations here.
Not quite as secure but far more practical for the everyday user. Hot wallets can be either custodial or non-custodial.
An example of a custodial hot wallet is the wallet given to you by an exchange when you set up an account. Here, the exchange is in charge of your private keys. Suppose you buy and store your crypto on one of the leading exchanges. In that case, the chances are that they are holding your funds (cryptocurrency) offline for increased security.
An example of a non-custodial hot wallet is Crypto.com’s DeFi wallet, a separate application from their exchange; however, with full control over their private keys. The advantage of an exchange having its own separate non-custodial wallet application is that it allows its exchange users to transfer from the exchange to their non-custodial wallet easily,
The crypto.com DeFi wallet. Source: Google Play
Unlike cold wallets, hot wallets require an internet connection, allowing you to make transactions from them easily.
Hot wallets can be desktop, mobile, online, or hybrid:
Desktop: these are downloaded straight to a computer and are only accessible from the computer to which they are downloaded. For maximum security, take steps to avoid hacking or stealing your computer.
Mobile: these are downloaded via a mobile application. They have greater usability and simplicity levels than desktop wallets.
Online: these operate on the cloud, which is accessible from various devices in any location. With online wallets, you do not control your private keys, as they are stored online by a third party. As a result, you do not have as much control over the security of your private keys.
Hybrid: these combine desktop wallets (restricted to a computer) and an online-based wallet (stored on the cloud). Most of your cryptocurrency account information is kept on the wallet host’s server, besides your private keys.
Suppose security is of utmost importance to you. In that case, a hot wallet is unlikely to be for you, as you are still susceptible to cyber theft with one. Large holdings of cryptocurrency should be held in cold storage.
The main drawback with external wallets is that, ultimately, you are solely responsible for your security. Not everybody is suited to that level of responsibility.
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KEEPING CRYPTO SAFE. COMPLETED. ✅
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