Storing your cryptocurrencies safely is one of the most important things you should consider. Cryptos are digital currencies that operate on decentralized networks, and compared to fiat, are much riskier to own.
While your bank may reimburse you for any money stolen from your account due to a hack or lost credit card, when you lose your crypto, that’s it, it’s gone for good. This is because blockchains are decentralized and not controlled by a particular organization, as opposed to your bank account which can be restricted by your bank at any time.
It is estimated that over $100 Billion worth of Bitcoin, is lost forever or stranded in accounts that cannot be accessed by owners.
To avoid your crypto being part of that statistic, we have a guide for you on how to store your cryptocurrency safely.
What is a crypto wallet: Cryptocurrency wallets can be in the form of paper, hardware, or software designed to safely store your crypto by storing the public keys and private keys used in transactions.
These wallets are common with exchanges, peer-to-peer platforms, and stockbrokers. Examples include Coinbase, Binance, Robinhood, Paxful, FTX, etc. Many prefer custodial wallets due to their ease of use and access, as you can easily access your crypto by logging into your account.
When you use a custodial wallet, the crypto is stored for you by a third party, either online or offline, and they keep the private key. This means you trust the third party with the security of your crypto.
In the recent past, exchanges like Coinbase have been hacked leading to the loss of millions of dollars from customer accounts.
However, in such cases where the platform is responsible for the lapse in security, customers are usually reimbursed. For instance, Coinbase carries a $255 million insurance against site-wide attacks. However, if an attack is more than the insurance coverage, the victims may not be reimbursed fully.
In cases where a customer is tricked into revealing his or her login credentials by hackers, such platforms are unlikely to admit liability.
Some custodial wallets allow you to transfer crypto to your private wallet. However, others don’t, allowing you to only buy and sell crypto without transferring it off the platform.
Risks of Custodial Wallets
- Phishing attacks: Attackers can trick you into filling your login credentials into a fake site purporting to be the real platform.
- Social Engineering: Attackers can convince you to unknowingly reveal sensitive information that can be used to take over your account. These can be emails, phone numbers, or any other form of identity.
- Compromised Platform: Platforms such as exchanges can be hacked and crypto in their hot wallets or user credentials stolen.
Hot Wallets are wallets connected to the internet and therefore operate online. They are usually available as mobile apps, desktop apps, and web-based apps. They are considered more vulnerable to attacks as the private keys are generated online.
So if a malicious party gains access to your private keys, you’re in trouble.
Hot wallets usually allow you to set a password and provide you with a private key and a recovery phrase in case you lose access to your account.
It is recommended to only store a small percentage of your crypto in hot wallets and the rest in a cold wallet (covered below). This minimizes the risk of losing all of your crypto in case of a hack.
While cases of cryptocurrencies and other assets such as NFTs lost through attacks on hot wallets are not unheard of, hot wallets are generally safe as long as you take security precautions.
Hot wallets are prone to the same attacks as custodial wallets. Attackers can gain access to your private keys and recovery seed phrase through:
- Social Engineering
An example of an attack is when Todd Kramer of New York’s Ross+Kramer Gallery, lost several of his Bored Ape Yacht Club NFTs through a phishing scam. The attackers were able to gain access to his wallet containing the NFTs and sold most of them before he could investigate.
If you’re into NFTs, you know how valuable the Bored Ape Yacht Club is. Check out these posts to learn more:
Cold wallets are arguably the most secure way to store your cryptocurrencies. They can be in the form of hardware wallets, paper wallets, and physical Bitcoins.
Cold wallets store your crypto offline, so attackers cannot access your assets remotely through phishing attacks and other types of breaches carried out on the internet.
Hardware wallets protect your crypto by storing your private keys on storage devices such as USB drives. Some feature intuitive interfaces that enable you to check your portfolio and easily transfer crypto to and from the wallet.
Some hardware wallets are multi-currency wallets, so they can support many cryptocurrencies.
When buying a hardware wallet, it is recommended to buy them directly from the manufacturer, not third parties.
Popular manufactures include Ledger, TREZOR, and KeepKey.
Before buying a hardware wallet, consider the following:
- PIN: A good hardware wallet should allow you to set up a PIN. Always set a strong PIN to increase security.
- A recovery phrase: This is a phrase that can be used to recover your crypto if your hardware wallet is lost or damaged. The phrase can be up to 24 words and is entered into another hardware wallet or hot wallet to recover the crypto. Never store your recovery phrase online or on a computer. Write it down carefully on a piece of paper and store it safely.
- Security Chip: Your hardware wallet should have a good security chip. A security chip is a microcomputer that ensures secure data storage, decryption, and encryption.
- User friendly: Some hardware wallets might be complicated to use. So a good one should be easy to use.
Paper Wallets are wallets that you can generate from certain websites and some ATM Machines. The private keys and public keys are printed out on a piece of paper, often represented by a QR code or characters. If you wish to transfer crypto from a paper wallet, scan the QR code from your hot wallet.
Physical Bitcoins, on the other hand, are somewhat niche and feature varying designs. Most ship with embedded private keys that can be accessed by the owners in some way. For example, before shutting down, Casascius was a physical Bitcoin that required owners to peel a hologram sticker from the back of the physical coin to reveal their private keys.
The private keys were letters and numbers that could be used to access a Bitcoin wallet containing a certain amount of Bitcoin(s).
It is recommended to store most of your crypto in cold wallets and only transfer them to hot wallets whenever you need them. Cold wallets should be stored safely to minimize the chances of misplacement. Preferably in safes, or safe deposit boxes.
- A cold wallet can be stolen, lost, or damaged in an accident, flood, or fire.
- If the owner misplaces the recovery phrase and the hardware wallet, the crypto is gone for good.
- Once a malicious party gains access to the private key on your paper wallet, your crypto is gone.
- Keep most of your crypto in cold wallets.
- Use 2-factor authentication(2FA) in all accounts associated with your crypto, e.g., exchanges and hot wallets.
- Only use hot wallets for storing small amounts of crypto.
- Do not click unknown links.
- Always ensure you’ve opened the correct URL in your browser.
- Change your passwords regularly or use a password manager.
- Do not disclose your portfolio to third parties to avoid getting targeted with phishing and social engineering techniques.
- Secure your recovery phrase offline and in secret locations such as safes. Don’t store them on digital devices.
- Never share your wallet’s private keys or recovery phrases.
- Install antivirus software on your computers and mobile phones to avoid the risk of malware.
Written by Edmond K.