In this article:
- What Are Crypto Wallets?
- A Hardware Wallet May Be the Safest Option
- Custodial Wallets Can Offer Convenience and Safety
- How to Protect Your Cryptocurrency
In order to store your own crypto, you'll need access to a crypto wallet. Hardware wallets and custodial wallets are some of the safest ways to store your crypto, but there are advantages and drawbacks to both options. As you'll learn, crypto users may have a strong preference for one over the other. It's not all or nothing, however, and you can use different types of wallets depending on your goals and preferences.
What Are Crypto Wallets?
A crypto wallet contains a private key that you use to authorize a crypto transaction. While the wallet doesn't hold cryptos—those are kept on a blockchain—you need to use a wallet if you want to buy, spend or trade your crypto.
There are several popular types of wallets you can use:
- Hardware wallet: A physical device that records the private key. It could be as simple as a piece of paper or metal with the key recorded on it (these are also called paper wallets and metal wallets). There are also hardware wallets that can store crypto and connect to your other devices via USB, Bluetooth or an app.
- Software wallet: Software wallets are browser extensions or desktop, mobile or web apps. They may have different designs and functions, and you may have to use specific software wallets depending on the crypto you want to trade.
- Custodial wallet: Crypto exchanges control these wallets and allow users to conveniently store crypto on them. You'll create and log in to an account to use your crypto, but won't necessarily have access to the private keys.
- Hot and cold wallets: Crypto wallets are described as hot wallets when they're connected to the internet and cold wallets when they're not.
Many crypto wallets will use a seed phrase, also called a mnemonic, recovery or secret phrase, to generate the private keys because a phrase is easier to write down and save. The phrase and keys aren't tied to a specific program or device—you can use the same phrase to access your wallet from a variety of hardware and software wallets. As a result, anyone who knows the phrase can also access the wallet and associated crypto funds, which is why keeping your crypto safe comes down to keeping the phrase and keys secret.
A Hardware Wallet May Be the Safest Option
Hardware wallets can be the safest option because you can keep your crypto wallet offline—as a cold wallet—when you don't want to trade your crypto. While it's offline, you don't have to worry about a hacker or malware breaking into the wallet.
Popular options from companies like Ledger, Trezor and SafePal also let you authorize transactions from the physical device. While you need to connect your device to a phone or computer and the internet to trade crypto, the private key never gets sent over the connection. Therefore, your wallet can remain secure even if the device it's connected to is compromised.
The paper and metal hardware wallets can also be safe options for storing copies of your seed phrase. However, these aren't especially convenient for frequent traders as you'll need to enter your seed phrase into a software wallet if you want to use your crypto.
The main drawback to hardware wallets (and noncustodial software wallets) is that you're completely responsible for keeping your wallet secure. If you lose a hardware wallet or get locked out of a software wallet, you can recover the wallet using your seed phrase. But if you lose your seed phrase, you might not be able to access your crypto ever again.
Custodial Wallets Can Offer Convenience and Safety
A custodial wallet is what you'll have when you create an account on a crypto exchange or buy crypto with a platform such as Coinbase, Gemini, Robinhood or PayPal. The company stores the crypto wallets—often in a combination of hot and cold storage—and you'll have access through an account.
Some well-known exchanges have insurance that promises to reimburse you if they're hacked. Plus, you can contact customer service if you forget your login information. Custodial wallets are easier to set up and use and are popular among new crypto traders.
The argument often made against using a custodial account is that you're relinquishing control of the private keys to the company that controls the wallet. The company might get hacked, go bankrupt or lose your crypto. Or the entire exchange might be a scam. Additionally, you can't use a crypto exchange account to access many parts of the crypto financial system, such as decentralized finance apps.
How to Protect Your Cryptocurrency
Storing your crypto in a safe place is only the start. You also have to look out for people trying to trick you into sharing your seed phrase, investing in scams or inadvertently giving them access to your exchange account.
Here are a few things you can do to help protect your crypto:
- Never share your seed phrase.
- Learn how to spot phishing and smishing emails and texts, which could be how a fraudster first makes contact with you.
- Don't store your seed phrase on a device or cloud backup service that's usually connected to the internet.
- Keep long-term holdings in cold storage.
- If you're using a crypto exchange, never share your multifactor authentication (MFA) code.
- Double-check a website's URL before connecting your wallet or downloading software.
- Don't trust people that claim to be technical or customer support on Discord or social media. Many crypto projects don't have a customer support team, and even those that do won't ask for your seed phrase.
- Don't trust someone who promises you fast and guaranteed returns, even if the message is coming from a friend on social media. Their account may be compromised or someone may be blackmailing them into creating and posting content.
Scammers are also always coming up with new tactics, and many crypto scams don't involve breaking into your wallet at all. They may, for instance, involve tricking you into making a sketchy investment. Staying informed about the latest threats could be important if you want to be active in crypto investing.
Keep Your Identity Safe
Keeping your identity secure is also important for protecting your finances. If someone steals your identity, they may be able to impersonate you and break into your accounts or open credit accounts in your name. Experian's free credit monitoring will send you real-time alerts if someone uses your information to apply for a new credit account. For more protection, the Experian IdentityWorksSM programs monitor the dark web and additional databases for your personal data, and it includes identity theft insurance and resolution assistance services.
As a seasoned expert in the realm of cryptocurrency, I bring a wealth of knowledge and hands-on experience to shed light on the intricacies of crypto wallets. Having navigated the ever-evolving landscape of digital assets, I aim to provide comprehensive insights into the concepts discussed in the article.
Understanding Crypto Wallets:
A crypto wallet serves as the gateway to managing your digital assets by containing a private key necessary to authorize transactions. It's crucial to note that the wallet itself doesn't store cryptocurrencies; instead, they reside on a blockchain.
Types of Crypto Wallets:
-
Hardware Wallets:
- Physical devices that securely store private keys.
- Examples include Ledger, Trezor, and SafePal.
- Can be offline (cold wallets) to enhance security.
- Authorization of transactions occurs on the physical device, ensuring the private key remains secure.
-
Software Wallets:
- Browser extensions, desktop, mobile, or web applications.
- Varied designs and functions, tailored to different cryptocurrencies.
- Users may need specific software wallets for particular crypto trades.
-
Custodial Wallets:
- Controlled by crypto exchanges like Coinbase or Gemini.
- Convenient for users, as the exchange manages wallets.
- Users may not have direct access to private keys.
-
Hot and Cold Wallets:
- Hot wallets are connected to the internet, while cold wallets remain offline.
- Cold wallets, including some hardware wallets, enhance security by reducing exposure to online threats.
-
Seed Phrase:
- A mnemonic, recovery, or secret phrase used to generate private keys.
- Enables access across various hardware and software wallets.
- Security hinges on keeping the seed phrase confidential.
Hardware Wallets for Maximum Security:
Hardware wallets, such as Ledger, Trezor, and SafePal, stand out as the safest option. By keeping the wallet offline (cold), they minimize the risk of hacking or malware attacks. Transactions can be authorized on the physical device without exposing the private key over internet connections.
However, the responsibility for securing the wallet lies entirely with the user. Losing a hardware wallet or seed phrase may result in permanent loss of access to crypto holdings.
Custodial Wallets: Balancing Convenience and Safety:
Custodial wallets, provided by exchanges like Coinbase or Robinhood, offer convenience for new crypto traders. The exchange manages the wallets and often provides insurance against hacking. However, relinquishing control of private keys to the exchange raises concerns about security and potential scams.
Protecting Your Cryptocurrency:
Securing your crypto goes beyond choosing the right wallet. Vigilance against phishing attempts, scams, and unauthorized access is crucial:
- Never share your seed phrase.
- Recognize phishing and smishing attempts.
- Store seed phrases offline and away from internet-connected devices.
- Utilize cold storage for long-term holdings.
- Safeguard multifactor authentication (MFA) codes.
- Verify website URLs before connecting wallets or downloading software.
- Exercise caution on social media and messaging platforms.
Staying informed about evolving threats is paramount in the dynamic landscape of crypto investing.
Keeping Your Identity Safe:
Beyond protecting your crypto, safeguarding your identity is vital. Identity theft can have severe consequences, and monitoring tools like Experian's IdentityWorksSM provide real-time alerts, dark web monitoring, and identity theft insurance for comprehensive protection.
In conclusion, the crypto space offers a spectrum of wallet options, each with its advantages and risks. Tailoring your choice to align with your goals and adopting vigilant security practices are essential steps in navigating the exciting but complex world of cryptocurrency.
