Every day a large amount of cryptocurrencies are bought and sold all over the world. Not everyone who invests in crypto possesses good basic knowledge about it, and yet people still want a portfolio that is varied. Because cryptocurrencies are not managed by a central authority or a Central Bank, the responsibility for keeping them safe lies with each individual. If crypto is somehow lost, it is almost impossible to get it back. There are therefore several important aspects that play a role in the safe storage of cryptocurrencies.
This may include things such as protecting private keys, protecting recovery seed phrases and the phishing phenomenon. The different types of wallets to store crypto in also plays an important role in securing cryptocurrencies. There are also several general tips that help to keep crypto safe.
What types of crypto wallets are there for safely storing cryptocurrencies?
There are three types of crypto wallets for securing cryptocurrencies. Wallets are a good way to store crypto. However, keep in mind that wallets do not store the actual cryptocurrency, but the private keys. A wallet can also be extra secured by a strong password and/or by using a multisignature or multisig. A multisig means that more than one person is needed to approve a transaction in a wallet.
What are private keys?
Crypto always remains on the blockchain, but with the private keys, the owner of these private keys gains access to the crypto. You must therefore always ensure that your private keys remain private. Private keys can be compared to a password. Anyone who has access to the private keys also has access to all crypto that can be accessed with these private keys. Therefore, the private keys should never be shared with anyone else.
When creating each wallet, a so-called ‘seed’ or ‘recovery phrase’ is also created. This is a list of between 12 and 24 random words. This list of words is important because it provides access to the wallet if you lose the wallet or are otherwise unable to access the wallet. For example, a computer or smartphone can get stuck or fall into the water. With the seed or recovery phrase you can still gain access to the wallet.
It is therefore really important to write down the seed phrase in the right order during the wallet creation process. It is also a good idea to make several copies of the recovery phrase and keep them in different but safe places. This is usually done on paper, but paper can burn or fall apart in water or become unreadable. That is why there are also stainless steel containers in which the seed phrase with can be stored in stainless steel letters. These containers are fireproof and can easily survive being underwater for a long time. This may seem a bit exaggerated, but if the value of someone’s portfolio is in the six or seven figures, it is certainly not a luxury.
It is never a good idea to store private keys digitally. These can then be hacked quite easily, resulting in theft of digital currencies
What is a public key?
A public key is also always created, but it does not need to be protected. The public key is not the same as the wallet address, but the wallet address is the shortened version of the public key. The public key is converted into a wallet address by means of encryption. Another person can send crypto to your wallet using the wallet address. This address can be used by anyone and influencers often post their public address on their profile, for example, so that indeed anyone who wants to can send their crypto.
The public key is important because it works together with the private key to authenticate transactions. A public key only works together with the correct private keys.
What is a cold wallet?
A cold wallet is the safest way to store cryptocurrency. A cold wallet is so secure because it isn’t connected to the internet. As a result it isn’t susceptible to a cyber attack or online hack. Via software on the computer or smartphone, contact is made with the cryptocurrency on the blockchain.
However, cold wallets also have a disadvantage, which is that they aren’t really suitable for sending crypto to and from an exchange every day. This is a cumbersome method so it is common to only store cryptocurrencies in cold wallets that won’t be used for trading for a longer period of time, but instead held for a longer period of time. Indeed, so-called ‘gas fees’ (transaction costs) must always be paid to send cryptocurrency back and forth from a cold wallet to an exchange or another wallet.
When trading crypto, it is also often necessary to be able to act quickly, due to the volatility of the crypto market. A cold wallet does not allow for fast trading, which is why it is quite common to leave a certain fixed amount on an exchange for trading.
Many exchanges work with the same idea, namely that they only have the cryptocurrencies on the exchange that are traded with. The rest of their stock of cryptocurrencies is kept in cold wallets, so that it cannot be stolen in the event of a hack.
The most commonly used cold wallets are:
Paper wallets
With paper wallets, a copy of the public and private keys is made. This can be done by writing down the keys on a piece of paper or by printing a copy of a QR code.
However, paper wallets are not used as often anymore as there are newer and better methods of using cold wallets.
Hardware wallets
A hardware wallet looks like a USB stick. These can be kept in a safe or other safe place. They are usually virus and water resistant and offer a multisig option.
There are various brands offering cold wallets, of which Trezor and Ledger with their ‘Nano S’ and ‘X’ series are the best known.
Sound wallets
Sound wallets are not very common, but they are an option. In this way, the private key is stored in an encrypted audio file, such as on a CD or on vinyl. The private key can then be deciphered using a spectroscope app or a high-resolution spectroscope.
Deep cold storage
Here, the possibility of storing the private keys in a bank vault is offered. As an extra service, it is also insured against loss or theft. The downside is that the name and address of the owner of the private keys is required. After all, one of the great advantages of using blockchain technology is that it is anonymous.
What is a hot wallet?
A hot wallet is a wallet that is online and connected to the internet. These wallets usually belong to a crypto exchange.
The biggest advantage of a hot wallet is that it can easily be used to trade cryptocurrencies. Without too much trouble, a crypto trader can move cryptocurrencies all over the internet.
The disadvantage of a hot wallet is that it is part of the ecosystem of a crypto exchange. This also means that the exchange is in possession of the private keys of this hot wallet. If the exchange is hacked there is a real chance that any crypto on this exchange will be stolen. Especially if the hacker manages to gain access to the user accounts.
In the DeFi (Decentralised Finance) world with its decentralised exchanges (DEXs) and also at centralised exchanges (CEXs), many exchanges have already been hacked. Therefore, it is important to properly research the security, privacy and reliability of a crypto exchange before using it.
What are online or software wallets?
Online or software wallets are downloadable wallets and are not linked to a specific crypto exchange. They are also a form of hot wallet, so they are connected to the internet, but the private keys are owned by the owner of these online or software wallets.
With these wallets it is also important to have a strong password. There is a large number of different online wallets on offer. Some crypto tokens even have their own wallet. There are also online wallets that allow you to store NFTs in them. Well-known online wallets include MetaMask, Trust Wallet and Exodus. These wallets are ‘non-custodial’, which means that the owner is in possession of the private keys. With these types of wallets, it is important that the so-called seed/recovery phrase is properly stored. Traditional 2FA cannot be enabled with these non-custodial wallets as with an exchange. A custodial wallet is when someone else has control over the private keys, but that person or agency is then trusted. This is usually a centralised exchange (CEX).
These online wallets are not more secure than the hot wallets of an exchange, because they are also hot wallets and connected to the internet. That is, they can also be hacked. Take precautions for good security, such as a strong password and install 2FA. However, it is also not a smart idea to brag on social media about how much cryptocurrency is in your wallet. That will only attract the attention of hackers who will do anything to gain access to the wallet.
What is phishing in the context of cryptocurrencies?
Phishing is a method that is widely used in the financial world, so the crypto world is no exception. Unfortunately, fraudsters have had quite a lot of success with phishing.
In phishing, hackers use, for example, emails that look just like the original. However, the links in the email lead to a hacker’s website and not to a safe place. Therefore, always check whether links are indeed reliable and safe. For example, watch out for spelling mistakes in the email or the address of the sender, as this is usually a very different address from the original company mentioned in the email.
It may also happen that someone asks for your private keys in an email. There are many imitators trying to take advantage of this. Never hand over private keys, especially not to strangers. Crypto exchanges, crypto projects and crypto influencers will never inquire about this data. They will not send emails or call to ask for this information. They also state this very clearly and regularly on their social media. When in doubt, it is better not to respond to any such emails or invitations. It is best not to click on any hyperlinks and if there is any doubt at all, please contact the official support of the concerned party and they will be able to clarify.
When making cryptocurrency transactions, it is important to always be on your guard. There is no central organisation or authority to rely on if something goes wrong. One of the advantages of blockchain technology is that all intermediaries are eliminated. This means that you are responsible for any action required to carry out a crypto transaction.
This sounds worse than it actually is. However, there are a few moments during a trade where you should pay close attention.
- Check every link you click and be sure where that link goes.
- Check the public key if you are copying it. Look at the first and last four characters of the code and compare them with the original before confirming a transaction. It is not a good idea to type a public key yourself, because they are usually too long, and therefore the chance of errors is very high.
General tips for keeping your crypto safe
There are several general tips to keep cryptocurrencies safe. Many of these tips are based on common sense. This often seems easier said than done, because every year many people fall prey to fraudulent practices and lose their crypto. For example, always use a unique and clean email address.
- Use a secure internet connection – When trading cryptocurrencies, a secure internet connection is very important. Therefore, do not use a public Wi-Fi network. Even on a home network, it is better to use a VPN as an extra layer of protection. A VPN changes each IP address and location and thus provides this additional protection.
- Install antivirus software– Install an antivirus program on all personal devices used to trade cryptocurrencies. This means all smartphones and PCs. Strong antivirus and firewall software are needed to keep hackers out.
- Change your password regularly – It is important to use different passwords for each application or crypto exchange visited. Too many people use the same password for multiple applications. A strong and complicated password is recommended. Use a minimum of 16 characters that are unique to each application. It’s also a good idea to use a password manager for this.
- Use 2-factor authentication – In addition to a strong password, 2-factor authentication (2FA) is also important. Make sure to install good and reliable app, such as Google Authenticator. It is better not to use any platform or organisation that doesn’t offer this form of protection.
- Research your chosen crypto exchanges – There are over 500 crypto exchanges. Research the safety and reliability of a crypto exchange before trading on it. For example, do they offer 2FA and SSL/TLS encryption? Use multiple exchanges for better risk diversification.
Summary
Because everyone is responsible for the security of any cryptocurrency they own, it is necessary to take precautions.
The first line of defence is to use common sense. Furthermore, there are different types of crypto wallets in which cryptocurrency can be stored. The security of these wallets varies, but cold wallets are the safest. In addition, there are hot wallets and online wallets. Each of these wallets has its pros and cons, so it is important to find out which wallet best suits one’s trading strategy. This will often be a combination of wallets.
Also watch out for phishing attempts. These sometimes seem deceptively real, so it’s important to watch out for forwarded links or someone asking you for your private key.