Cryptocurrencies are fast on their way to mainstream adoption and are allowing people everywhere to manage their own money and become their own banks. With the price of Bitcoin, Ethereum, Litecoin and other coins rapidly rising, ensuring that your funds are safe and secure should be top priority for new users and existing crypto holders alike.
There are many different ways to store your coins, but how do they work and which keeps them the safest?
What is a cryptocurrency wallet?
A wallet can be thought of simply like a physical wallet storing cash, your wallet must be kept safe or your funds are at risk. Technically, with blockchain based currencies, your coins are not actually stored in your wallet, or anywhere for that matter. Rather, a wallet is storing the public and private keys required to access, send and receive funds. A public key (or wallet address) allows you to view the transactions associated with that address. The address 12c6DSiU4Rq3P4ZxziKxzrL5LmMBrzjrJX is one of the first to have been used on the Bitcoin blockchain and may very well belong to Bitcoins infamous creator Satoshi Nakamoto. By using a tool like blockchain.info https://blockchain.info/address/12c6DSiU4Rq3P4ZxziKxzrL5LmMBrzjrJX we can view the transactions associated with the address and see the current balance of around 50BTC. A private key is the key associated with an address that signs transactions allowing your funds to be sent.
The 2 main points to take away from this are:
1) Anyone who is able to gain access to your private key has access to all of the funds associated with that wallet.
2) If you don’t own a wallets private key then you do not have control over the funds in the wallet.
The different types of wallets
Let’s explore some of the different types of wallets available and their usability / security implications.
Online - Online, or web-based, wallets are a commonly used and convenient method of storing your private keys. They allow access to your coins from a wide range of devices and many can be linked to desktop and mobile wallets. The major safety concern here is that a third-party has control of your private keys. This means you’re trusting your coins in the hands of the online wallet’s owners. For a prime example of why storing your crypto in online wallets or exchanges is a bad idea you have to look no further than what happened with Mt Gox. Mt Gox was an exchange that, in 2014, was handling over 70% of all bitcoin transactions. In February of 2014 Mt Gox suspended all trading and filed for bankruptcy after a supposed hack had taken place. Over 850,000 Bitcoins were lost that at the time were worth around $450,000. I’ll let you do the math of what that would be worth today!
Desktop - A desktop wallet is a program that stores private keys locally on your computer. This allows a level of freedom that some other storage methods can’t provide, but access to your coins is tied to your device. If you’re system is hacked, or if you suffer a mechanical failure, you could permanently lose access to your coins. For this reason, it’s not uncommon to keep the device that runs your wallet totally disconnected from the internet. But of course you are still vulnerable to attack when you connect to the internet to send transactions.
Mobile - Mobile wallets are similar to desktop wallets, only accessed through a mobile app. The benefit here is an even greater ease of access. If you are using an Apple device some people insist that IOS is more secure than desktop and android but there is not a considerable amount of evidence to support those claims. There are mobile wallets which store your private keys locally, like desktop wallets, and some that store them with a third-party. This poses the same security risks as desktop and online wallets respectively.
Paper wallets / Cold storage
A paper wallet is as simple as it sounds... a physical piece of paper with your public address and private key printed onto it. With the proper care, this is a very safe way to store Cryptocurrencies. Since your keys are stored offline, you’re not at risk of malware/keyloggers gaining access to your coins. The downside to this method is that if you lose or destroy the paper wallet, or it is taken from you, you will lose access to your coins permanently. Another security concern is that the computer with which you generate the wallet address should be totally offline so that there’s no way the addresses can be intercepted at the time of generation / printing. There are methods of doing this safely but they can be fairly complicated. Look out for an article here soon with step by step instructions. While generally safe, paper wallets are not nearly as convenient as other storage methods since you cannot spend a portion of the funds on a paper wallet. You must spend the full amount stored at the time of sending a transaction or you run the risk of losing your balance. Also, funds on a paper wallet must be added in to a software (desktop or mobile) wallet before they can be spent so at that stage you are still vulnerable.
Hardware wallets are dedicated devices that digitally store your private keys and sign transactions offline on a separate microchip which never released the private keys to the outside world. Certain hardware wallets also force you to confirm each transaction on the physical device before the transaction will be signed. These two things mean that you could connect your hardware wallet to a computer compromised with malware and your funds would remain secure. Hardware wallets provide the security benefits of offline storage methods, such as a paper wallet, with the convenience of being able to make frequent transactions. Unlike a paper wallet, you’re free to send and receive any amount of crypto. Hardware wallets can also manage multiple addresses/currencies on a single device so your entire cryptocurrency portfolio can be managed in one secure location.
When setting up a hardware wallet you will be given a list of (usually) 24 words. These 24 words can be used to restore your balance to a new wallet in case of a lost, stolen or damaged wallet. Hardware wallets are typically secured by a PIN number it would be incredibly difficult for a thief to gain access to your funds before you restore the balance to a new wallet.
If security is your primary concern, choose a hardware wallet from an offical, trusted manufacturer and dealer.
Whichever storage method you use, it’s always important to follow good security practice. Use strong passwords, keep secure backups and don’t share your private keys… EVER! If you ever suspect that your wallet has been compromised, move your coins to another address and tighten your security.
If there’s anything we forgot to address here or if you have any questions at all about securing cryptocurrencies please don’t hesitate to get in touch!