If you’re a newcomer to the crypto space it’s likely you’re excited about it, but at the same time worried about security because you have heard the stories about people losing fortunes just because they lost the password to their crypto wallet. On top of that, you may have searched for reliable information about keeping your wallet secure, but haven’t found it yet. It’s important that you carefully consider the pros and cons of how you ultimately decide to purchase, store and transact with your crypto. After all, if you lose your crypto it is gone forever!
How people lose their crypto
Here are some of the ways in which people have lost their cryptocurrency holdings:
• Human error
(e.g., you send your funds to the wrong wallet, you forget your password)
• Natural disaster
(e.g., your house burns down with your crypto wallet(s) stored inside it)
• Hardware malfunction/loss
(e.g., your computer hard drive holding your private keys is corrupted)
• Remote theft
(e.g., you fall victim to scams, an exchange hack, or a personal hack)
• Physical robbery
(e.g., your backpack or purse is stolen with your private keys in it)
• Government seizure
(e.g., law enforcement demands an exchange to freeze your account)
I hope none of these happen to you.
Types of wallets
A wallet is a computer programme that stores crypto. Depending on whether the wallet is connected to the internet, crypto wallets are classified as: “hot” (online) or “cold” (offline).
Hot storage wallets exist on an internet-connected desktop, laptop, mobile phone or
web browser. These wallets are popular because they can be easily created and used
immediately. This means some safety is sacrificed and they are vulnerable to cyber attacks.
Cold storage wallets exist on devices or physical media that are not connected to the
Internet. Often they are like a USB flash drive. They are safer than hot wallets because private keys are generated and stored offline where they can’t be accessed by cybercriminals, but they can be stolen from you through a physical robbery. The downside is that funds in a cold wallet aren’t as available for spending as those in a hot wallet. The most reliable exchanges, such as Kraken, Coinbase and Binance use both hot and cold wallets so that some funds are always available for immediate use (in hot wallets) to facilitate day-to-day transactions, while the majority are stored offline for safekeeping (cold wallets). When storing your crypto, you should take your own personal financial situation and risk tolerance into account when you are considering which one of the following storage strategies to use.
The small investor
If you have less than $10,000 in crypto, the best advice is to keep things simple and use a reputable exchange to store your crypto. Kraken, Coinbase and Binance are the big names, but your choice may depend on where you live.
The medium investor
With $10,000 – $200,000 in crypto, you should use a hardware wallet and place a backup copy in a safety deposit box.
The large investor
If you have over $200,000 in crypto, it is recommended you need a trusted custodian, multi signature wallet technology and/or full nodes. Consulting with a professional about this is recommended.
How Do Wallets Work?
Crypto wallets function is a similar way to traditional bank accounts, in that both an “account
number” and “password” are required to access the funds held in the wallet. When you
creates a wallet, you generate a unique cryptographic key pair – one public and one private –
which allows you to send or receive crypto. The public key is like your bank account number, and the private key acts in a similar way to your banking password. Here is an example of how a wallet operates for a transaction:
Example of a Bitcoin Transaction
1. Alice owes Bob 0.02 bitcoin
2. Bob sends Alice his public wallet address to receive payment
3. Alice uses her own private key to send 0.02 bitcoin associated with one of her wallets
to Bob’s public wallet address
4. The 0.02 bitcoin sent by Alice is received in Bob’s wallet.
And that’s how easy it is.
A last word of advice
Don’t store your assets in desktop wallets, ‘brain’ wallets (i.e., memorized private key), or web wallets (i.e., private key held on a website) as these wallets offer low security. If you are going to buy a hardware or software wallet, buy it from a reputable authorized retailer and not from second-hand stores, such as eBay.
Finally, every crypto owner must have a plan for their crypto when
they pass away. If no plan is put in place, your crypto assets will die along with you.
It’s essential that every crypto owner includes their crypto asset holdings in
their will and teaches one or more trusted individuals (i.e. family members) how to access
their crypto funds in the case of severe injury or death.