According to a data tracker platform Triple-A, there are over 320 million users who own cryptocurrencies worldwide. This highlights the growing demand for cryptocurrencies and crypto exchanges that provide long-term trade value.
The first step toward investing in crypto is setting up your crypto wallet and organizing your crypto portfolio. A crypto wallet comes in different forms and lets you store all your crypto and blockchain-based digital assets. In this article, we define what a crypto wallet is, understand various wallets and go through some tips to keep your assets safe.
Introduction to wallets
Before delving into wallets, let’s understand cryptography, or the science of secure communication and information, in brief. Now, public-key cryptography is an encryption technique based on the use of two mathematically related, but identifiably different keys, namely a public key and a private key. Public and private keys perform unique functions required for encryption and decryption, respectively. A unique alphanumeric identifier or address is generated using these keys, defining the location of coins to be sent to the blockchain. Funds may be received at this shared address, but you must never disclose your private keys.
What is a crypto wallet?
A crypto wallet is a hardware or software wallet that is based on public-key cryptography. Unlike a conventional physical wallet, which holds your fiat currency, a crypto wallet doesn’t hold any of your crypto assets, but rather holds the public and private keys of all the crypto in your possession.
Types of crypto wallets
Wallets are broadly divided into hot wallets and cold wallets.
Hot wallets
A hot wallet is a crypto wallet that is connected to the Internet and blockchain networks. Hot wallets act like users’ interfaces for accessing and storing users’ cryptocurrencies. The role of a cryptocurrency network is to facilitate any changes to transactions recorded on a decentralized blockchain ledger. Some of the popular hot wallets are web-based wallets, desktop wallets, and mobile wallets, which include Binance and Coinbase. Their ease of use for trading or purchasing crypto assets appeals to users, though these wallets are often vulnerable to cyberattacks.
On August 2022, the Solana blockchain ecosystem was attacked by a bad actor, draining over 8,000 internet-connected wallets and stealing both Solana tokens and USDC stablecoins. Losses are estimated to be around $8 million.
It is important to consider several factors like reputation, fees, customer service, security, and types of supported cryptocurrencies before choosing a hot wallet.
Cold wallets
Cold wallets or cold storages are devices or applications—that resemble USB drives—that store their users’ private keys offline. Most people avoid cold wallets because of their complexity and cost. However, their advanced security protects your crypto assets even if your computer is hacked or destroyed and your private keys are safe with you.
Cryptocurrency Wallets: Best Practices
Here are some tips to keep your cryptocurrency wallets safe:
Backup your wallet regularly
Wallets, whether hot or cold, are vulnerable to security threats posed by hackers and malware. You can prevent this by keeping a small amount of crypto assets in online wallets and storing the rest offline in a cold wallet. Make sure to take a wallet backup at regular intervals.
Secure your wallet
Use a long-form password to secure your digital currency wallet. Add authentication features, such as two-factor authentication, by making use of reputable companies to generate them.
Maintain a current wallet software version
Hot wallets constantly update their software. Ensure your wallet software and mobile or laptop software are up-to-date to take advantage of their advanced security features.