How to protect your crypto wallet
Security is one of the most important words in crypto. It's also one of the reasons why many people hesitate to invest in cryptocurrency. However, protecting your funds is easier than you think. There are several simple rules on how to protect a crypto wallet, which we will share with you in this article. Let's explore the main variations of crypto wallets and how you can protect them.
What is a crypto wallet?
Cryptocurrency wallets let users manage their crypto balances. They store public and private keys and support cryptocurrency transfers through the blockchain. Depending on what wallet type you choose, you can interact with decentralised apps and buy and sell crypto assets.
Cryptocurrency transactions don't represent the process of sending crypto tokens from one smartphone to another. When you send cryptocurrency assets, you use private keys to sign the transaction and broadcast it to the blockchain network. It then includes your transaction to reflect the updated balance in your address and the one of the recipient.
So, cryptocurrency wallets don't actually store crypto assets like physical wallets. They function by reading the public ledger to reveal the balance in your address and holding private keys to let you make transactions.
Crypto wallet types
Before discussing tips and rules on how to protect crypto wallets, let's learn about different types of wallets and which is the best fit for your needs.
Generally speaking, there are two main types of crypto wallets: Software-based hot wallets and physical cold wallets.
The main difference lies in the connection to the Internet. Hot wallets need an Internet connection to work smoothly, whereas cold wallets are mainly kept offline. It means the funds stored in hot wallets are more accessible for hackers than crypto assets in cold wallets.
The first and foremost recommendation to everyone wondering how to keep crypto in a wallet and protect it against security breaches would be not to store large amounts of your assets in a hot wallet. You can mitigate the risk of storing digital money in hot wallets.
Some of the most common examples of hot wallets include:
- Web-based wallets
- Mobile wallets
- Desktop wallets.
Cold wallets are kept offline. They are a less convenient way of storing your crypto assets but more secure. The two most common examples of cold wallets are paper wallets and hardware wallets.
Hot Wallet vs Cold Wallet: What's the Difference?
Both types of crypto wallets have their benefits and drawbacks. The best option depends on what you expect to get and how you'll use it. If you plan to trade daily, then the accessibility of the cryptocurrency wallet is important. In this case, hot wallets should be your best pick. On the other hand, if you need to store big amounts of crypto assets and pay a lot of attention to how to keep your crypto wallet safe, then it would be a wise move to invest in a cold wallet.
Vulnerable to hacking
More resistant to attacks
Easy to use
Less convenient, more expensive
Best suited for beginners and regular traders who need to make quick online payments
Best suited for those who need to store big amounts of crypto assets for a long time
Other Types of Crypto Wallets
Besides the two major types of crypto wallets, there are several subtypes.
- A paper wallet is a physical location where a private or public key is printed or written down. It's a safer solution than keeping your funds in a hot wallet because there's no way for hackers to access these private keys. On the other hand, the risk of losing a paper wallet or destroying it may result in irrecoverable funds.
- A hardware wallet is an external device (usually a USB or Bluetooth device) that stores your keys. You can sign a transaction by physically clicking a button on the device that thieves can't access. A hardware wallet should be the best choice for people who don't need instant access to their crypto assets and feel fine about storing their cryptocurrency offline in a cold wallet.
- Most web-based wallets fall into the category of custodial wallets. You can often come across such crypto wallets being offered on exchange platforms. These are especially popular among beginners and are best known for their convenience and ease of usage. The main feature making custodial wallets different from paper and hardware ones is that you don't have full control over your tokens, and that's the exchange platform that holds private keys needed to sign for transactions. With that said, you should be 100% confident in the selected service and prevent unauthorised access using strong security measures, like two-factor authorisation, e-mail confirmation, fingerprint verification, etc.
- Non-custodial wallets provide you with full control over your crypto assets because the private key is stored locally with the user. When using a non-custodial wallet, you're commonly asked to write down and safely store a list of 12 randomly generated words. This phrase acts as a recovery mechanism that lets you access the funds stored in your crypto wallet whenever you lose access to your device.
- Using multi-signature wallets should appeal to everyone interested in how to protect crypto wallets. They authorise transactions using two or more private keys. Such solutions are especially useful for individuals worried about losing access to their wallets and seeking secure ways to sign their transactions. Multi-signature versions are available for all crypto wallet types described above.
- An NFT wallet is one of the safest places to store non-fungible tokens (NFTs). NFT wallets fall into two categories: hardware and software-based wallets.
Now that we've briefly reviewed all the major types of crypto wallets, let's see how crypto wallets work and how to keep your crypto wallet safe.
How does a crypto wallet work?
Cryptocurrency isn't stored in a wallet. Instead, crypto coins exist on the blockchain, and the crypto wallet lets you interact with the balances held there. A cryptocurrency wallet is an address that allows its owners to move coins elsewhere and lets others see the balance held at any given address.
Most crypto wallets allow users to send, receive and store cryptocurrency. Some of them also have the feature to buy and sell crypto. Furthermore, depending on your wallet type, you can access extra features like decentralised applications (dApps) built on different networks, swapping between tokens, etc.
Each cryptocurrency wallet has its specifications and nuances in how it functions. However, in general, they're used for sending and receiving crypto coins, and it's suggested you take the following steps for sending and receiving crypto assets:
- To send funds, you need the public address of the receiving crypto wallet. Find your crypto wallet's "send" feature and enter the receiver's address. Next, choose the amount and type of crypto coins you want to send. Before sending big amounts of money, consider doing a small test transaction. Mind that sending crypto coins requires a fee paid to miners in exchange for proceeding with your transaction.
- You must retrieve a public key from your crypto wallet to receive funds. Find the "generate address" feature in your crypto wallet, click it and copy the alphanumeric address or QR code. Share it with the person who wants to send crypto to you.
Important note: When sending a cryptocurrency, always ensure you're doing it to an address of a wallet of the same type of cryptocurrency. For example, when sending Bitcoin (BTC), ensure that you're sending to a Bitcoin Cash (BCH) address. Otherwise, your funds will be lost.
How to choose a crypto wallet?
Choosing the best cryptocurrency wallet isn't only a matter of preference. It should also involve a series of pragmatic reasons, including but not limited to:
- Costs. Most crypto wallets are free. However, hardware wallets commonly require a small investment. If you're going to hold your crypto coins for long, it's better to invest in a hardware cryptocurrency wallet.
- The volume and type of cryptocurrencies the wallet will hold. If you hold more than one type of cryptocurrency, you'd better consider choosing a crypto wallet featuring multi-currency support. If you're going to use the crypto wallet to send and receive one crypto coin, you should check on the developer's website to see if there's a dedicated wallet for your needs.
- Are you prepared to trade daily?
- Is it important for you to access the crypto wallet quickly?
Cryptocurrency wallet safety
Security plays a significant role when you need to choose the best crypto wallet for your needs. It's important to carry out plenty of research about the crypto wallet's security features before making the final decision. If you need to ensure all your funds are safely stored, you'd better opt for a hardware crypto wallet.
With that said, let's see how to keep your crypto wallet safe.
How to protect your crypto wallet
The following tips should give you clear guidelines on keeping your crypto wallet safe. You may not need all of them. However, this list should help determine what works best for you.
- Store your crypto assets in a cold, hardware crypto wallet. You may not need all the crypto assets that you own. It's always wise to store a small number of crypto assets in a hot wallet for transactions and keep the rest of those offline.
- Use reputable exchanges. Do your research to determine which cryptocurrency exchanges have ever been hacked. Don't put your investments at risk when choosing an exchange that can potentially put your crypto assets at the risk of a cyberattack.
- Set a complex password. Never reuse a password you already have on any other website or app.
- Avoid phishing attacks. Never log in to your cryptocurrency exchange unless you're sure you are on the correct website. Save the URL address to favourites and consider using it rather than clicking on the links randomly sent to you.
- Don't use public Wi-Fi to access your cryptocurrency exchange or your crypto wallet. Instead, maintain your online privacy by using a VPN service.
- Make sure that your device and all software installed on it are always updated.