Topic: Earn merit by telling us about the dangers in using 3rd party wallets. (Read 684 times)

In fact, I would like to say that other than the official wallet, other wallets are dangerous

When I was looking answers for this initial question (Of course I googled and read some documents, Sources are mentioned below) I got to know few new things regarding Bitcoin wallets. Since many of the replies converge to the answer I am not going to go through that same stuff over and over again.


As clover 12 suggested here I thought to give a brief Idea as much as I understand. (Please feel free to give suggestions and corrections since I am not an expert nor had any prior experience and this reply only depicts two hours of googling and digging in crypto websites.)

For the simplicity of understanding, I am going to use an Answers and Questions approach.

Q1 ) First of all what is a crypto wallet?

As you already know we need a digital wallet to store any cryptocurrency. A wallet is basically a software which stores private and public keys (Two Cryptography methods used in encryption) and interacts with various blockchain to enable users to do digital currency transactions.
 
NB:

Unlike traditional ‘pocket’ wallets, digital wallets don’t store currency. In fact, currencies don’t get stored in any single location or exist anywhere in any physical form. All that exists are records of transactions stored on the blockchain. In other words, this is like a huge ledger where we note down all the expenses and incomes.

Q2) The Ops question is about third-party wallets, Then There must be another type of wallets, Is it?


As OP has said here He is referring to all the wallets other than a core wallet as a third-party wallet.


Q3) What is a Core wallet then?

Bitcoin Core is the software that runs the entire bitcoin network. Included in the Bitcoin Core software is a secure digital wallet that can be used to store, send and receive bitcoin. By choosing to store your bitcoin in the Bitcoin Core wallet, you can contribute to the decentralized bitcoin network by validating transactions and storing a copy of the blockchain.
It takes a little bit of technical knowledge to get started with the Bitcoin Core wallet, but when it comes to security the original bitcoin wallet is still hailed by many as one of the safest places to keep your funds.
And do not get into a false sense, as everything in life Core wallet too is far from being perfect. It too has pros and cons. While the high level of privacy and security being the most visible pros, having to download a file of size around 150GB (This is free to download and works well with most of the common Operating systems Including Windows 7,8,10 versions, Linux, Mac Os and also with raspberry pi V.1, V.2), having to store this large file  in your local machine with limited resources and requirement to know your way around the Bitcoin core would make a beginners life bit harder.

Q4) Okay, Core wallets sound good, I wanna set up a one, tell me how to do it.

If you still need to go with a Core wallet (Actually the preferred way among experts in the field) here is a guide for you.


Q5)  I don’t need that so-called valuable information! Just tell me about third-party wallets!!

Unlike in a core wallet, the information can be accessed from anywhere since the wallet is saved in a remote cloud server. As everything is on the web, this too is a security vulnerability. Since the drawbacks are well covered in above replies I am not going go through the same stuff over and over again.  I’ll tell you the answer for the exact opposite question which OP asked.

Q6) What are the advantages of using a third party wallet?

You do not have to have a technical knowledge at all, Go to the website and enter a password BAM! You have a wallet.
You do not need to do any update manually. You may have thousands of problems but maintaining the blockchain file, updating it won’t be one of them. It will be taken care by the wallet hosting site. There will be no emails, text messages or pop-ups telling you an update needs to be downloaded.

Obviously, as OP has mentioned clearly using a third party wallet is a huge risk, as in all cases High convenient comes with High risk. There are numerous cases has been reported throughout the history of Bitcoin regarding security vulnerabilities with use of third-party wallets.

Please go through the answer of napsterz(https://bitcointalksearch.org/topic/m.40737106) as it seems to be covering the OP’s question.  
Cheers!


PS: If this reply is out of the topic I apologize for that and please feel free to delete.  



References:

1.   Bitcoin Core ( https://en.wikipedia.org/wiki/Bitcoin_Core )
2.   Bitcoin Core: The original bitcoin wallet – June 2018 review ( https://www.finder.com/bitcoin-core-wallet-review )
3.   How to set up the Bitcoin Core wallet Client for Beginners and send your first Transaction ( https://medium.com/@CoinMeteor/how-to-set-up-the-bitcoin-core-wallet-client-for-beginners-and-send-your-first-transaction-819c6d5b9790)
4.   Public Keys and Private Keys (https://www.comodo.com/resources/small-business/digital-certificates2.php )

Edit:
I found this Immensely helpful link regarding Bitcoin wallets and I suggest all the newbies take a sneak peek here!

Lets say 3rd party wallets are more beneficial than the main wallets, 3rd party wallets have more features that they offering like coin swapping , multi cryptocurrency wallet and many more but this is the deal using 3rd party wallets you are just like letting them to controlled your coins and also you dont have a freedom to choose what will be the FEE for every transaction you will make (like in exchanges).And also 3rd party wallet is very prone in hacking that attackers can stole your coins in instant. To those beginners that reading this i didn't saying that all of 3rd party wallets are not safe to use just pick a 3rd party wallets that you can trust your assets.

Fraud, misuse, and lack of safety are the maximum common dangers related to third-party wallet processors these days .

Deposit relationships with payment processors can disclose monetary institutions to risks not found in regular business consumer relationships, along with more strategic, credit, compliance, transaction, legal, and reputation threat.

We need to constantly preserve networks separate, review how they’ve dealt with and pointed out protection breaches, examine online evaluations, and ensure that they do now not use an automatic vulnerability management system to guard information.

Most I guess were mentioned already. So I'm just writing down some more based on my personal experience.
Advantages:
Free
Easy access of assets to trade any time whenever opportunity arises
You can convert one asset to another within the same exchange/wallet

Disadvantages
Possible loss of assets if available protection is not utilized
Some require min amount of withdrawal. If you have only change you can forget about it, unless you will deposit some more to get it, which I find impractical as this will cost you more due to transaction fees.

I may have missed it, but I think you asked for ways to avoid the dangers of third-party wallets? Well how about don't use them and use a Trezor, Ledger Nano instead? I think an easy to use hardware wallet is ALWAYS the way to go. Some people think they are expensive, and I get that, but once you lose your coins (like we all do) because of a scam, or you can't remember your password (how many BTC are frozen because of that) you will see that $100 (or so) is a great deal.

I think those little devices are great.

Here are way to get them:

https://shop.trezor.io/?h=7472657a6f722e696f (buy a Trezor here, direct from the maker, much safer than buying elsewhere, a Trezor One is good enough, you don't need the new fancy version)

https://www.ledgerwallet.com/products/ledger-nano-s (buy a Ledger Nano, direct form the maker)

These things take about 15 minutes to set up and then your private keys never touch the Internet.

I read an article once about a guy who tried to hack his own Trezor. I think he failed, but I learned a lot.

https://www.wired.com/story/i-forgot-my-pin-an-epic-tale-of-losing-dollar30000-in-bitcoin/

I advise you not to use third-party wallets. At any time will be without their savings! Do not use wallets on smartphones. It is better to use Linux or a virtual operating system to work with wallets and exchanges. Keep passwords, private keys in a safe place. Good luck to all crypto-enthusiasts!

What I think are the dangers of using 3rd party Wallets:

1. Access - Because the website is freely accessible online on any browsers, your personal information namely your wallet address could be in trouble. If you are outside and are using a public network then you are more vulnerable to cyber attacks.

2. Security - 3rd party wallets need to safely protect your information from prying eyes, they may have very weak encryption and hackers might be able to breach, also their admins and staff could also circumvent their own security and this may lead to you losing all your money on your wallet when that employee decides to go rogue.

My 2 cents. Thanks!

Let's talk about both advantages and disadvantages of third party wallets.
I don't think it is reasonable to discuss only about the 'dangers/ drawbacks' of third party wallets.
Any discussion and point of view should be taken into consideration in both sides, should not only positive or negative sides.

1. Advantages:
- No requirements for hardwares to install, set up, and synchronize wallets, which also requires a lot of time. For someone, who can not buy strong hardwares to do these tasks, using third party wallets are their best choice.
- No requirements on technical issues, especially someone who have very limited knowledge, skills on computers (the elderly, women - most of those sort of people). They can get and store wallets easily by following guided steps from third parties.
- Can get helpful supports from third parties when have demands to recover wallets, etc.

2. Disadvantages:
Now, let's talk about drawbacks of using third party wallets, which is the main point to discuss of the topic.
- There are risks to lost your money due to unexpected serious issues with third parties, such as hacks, scam third-party wallet providers. Using wallets from third-party providers, you put your money under their controls, which in turn result in high risks of losing money due to their bad manangements.
Of course, users should discover carefully about third-party providers which they would like to use their services. Doing this will help users to lower risks with providers to much lower odds.
- Your transaction orders might get stucked due to maintenance or frozen modes from third-party wallet providers at any time, which you don't know when it will occur.
- Won't get any support if you choose wrong providers (scam providers).

To sum up, spending time to discover about third-party wallet providers, their services, chronological events (if they got terrible issues, hacks before, how they solve those ones is very important), before deciding to use their services.
It's also better to choose third-party wallet providers have cold-wallet storages.

Firstly, thanks for this thread, apart from the opportunity to earn merit. I believe this kind of thread will help get many newbies informed and also serve as a friendly reminder to experienced members. I will not waste time on definition because I believe the previous posters combined have done justice to that.

However, I think there's another important danger to using third party wallets that have not been mentioned yet, which is that; using third party wallets puts you and your coins at the mercy of the developer(s), especially if it's not an open source project with a large active and well motivated community.

I didn't realise how crucial this can be until the recent issue that happened where a developer threatened to split the Zcash Network if he wasn't paid in return for his development efforts.

According to CoinDesk; D. Jane Mercer, the sole maintainer of the Windows Zcash wallet software, said he was going to cease development of the clients and release a zcash competitor "rebranded as another coin," if he didn't get further funding for his work. And, I think the community had to contribute for him, to sort of bribe him before the issue was resolved. Full story at https://www.coindesk.com/zcash-pays-off-angry-developer-avoid-blockchain-split/

In this case D. Jane Mercer single-handedly made a decision which put the status of clients coins, those who have trusted their wallets to his wallet software at a big risk, because in such cases, the situation could have gone the other way which might have got messy, and I'm sure the developer knew his power lies in his uses base, so he probably might have found a way to hold his use base hostage to achieve his aim (just my personal opinion though).

So, to add to all the the previous posters have said, if you must use a third party wallet always make sure that "in addition to other things" it's an open source project, possibly maintained by a community of developers that well motivated.

MEW is can't catagorize as a 3rd party wallet since we are the only having "private key", not the MEW team.

The hacking thing about MEW is another aspect which happens if we entered our private key through a phishing link. So it's better not to use keystore file(JSON) or private key in order to login your account. Always try to use servise like"Metamask" which is less likely to be phished.

I'm certainly new here but I think the dangers of using third party wallet can be summarized by saying bitcoin is decentralized whereas not all third party wallets are

Using a 3rd party wallet you will not be able to guarantee that your money is safe. As far as I remember, Myetherwallet was attacked not long ago. Your money will not be safe anymore

As lots of users above commented, there are both advantages and drawbacks of using third party wallets.
Consequently, each one will have specific purposes, and different choice to use third party wallets or set up their old wallet with full control of wallet by themselves.

The dangers in using third-party wallets are that the wallet is stored on remote server, so the information is easily accessed from anywhere, no matter what computing device you're using. That is to say, third-party wallets are almost exclusively web wallets. Those who didn't use third-party wallets find it hard to trust the third-party wallet when it comes in safety.

These sort of incidents are a little bit like when hackers compromised Target’s payment system, and stole customers’ credit card information. In the case of bitcoin owners, they are doing business with companies that don’t have proper cybersecurity measures in place—and worse, unlike the Target breach, no one is likely to refund their money.“Exchanges” may be hacked now and then.In my opinion even the most reputable bitcoin exchanges are suspect. Not because of intention but because of the many ways an exchange is subject to attack.Anyone using 3rd party wallets must be  careful.

Third party wallets are web wallets that are stored by a third party (in most cases exchanges) usually on a remote server.  Because of that, the information is accessible from anywhere and from any device .These digital wallet apps are managing your private and public key for You , but  because this data resides on Your computer or smartphone ,there is a risk that someone hack your founds.
To prevent  and avoid losing funds  and not to expose Yourself to unnecessary risks, there are some precautions to follow  :

If coins are stored on  the  Exchange only keep funds that You plan actively trading with. Use  a unique and dedicated email address for all trading accounts, create difficult password ( not used elsewhere ).

Do not save auto fill  account details  of the Exchange on Your PC ( username and password ) , do not click on advertisements, regularly run antivirus software on your mobile and PC, type the exchange URL directly to the browser and when You are on  the Exchange clean the cookies.
Exchanges should have 2FA enabled and save 2FA recovery on a safe place.
Join the network by private  encrypted channel using VPN technology.

Cryptocurrency  that You are not trading with store on hard wallet bought directly from manufacturer or official distributor. (Avoid eBay&Amazon sellers)
Keep private keys for your hardware wallet on a secure location.

Many people use MEW to participate in the bounty. Everyone knows that there is a private-key for using the wallet. Since this topic is about security, I think it would be appropriate to show my article how to make an encrypted volume for storing important data: https://bitcointalksearch.org/topic/safe-storage-of-data-guide-3361608

I disagree. Android phones are cheap, and plentiful. If you're an Android user, chances are, you have a spare Android phone lying around somewhere (I currently have two alongside). You can fairly easily wipe it, and install Bither/Mycelium/BreadWallet/Your Android Wallet of choice and keep it as an offline/airgapped wallet. Yes, there are many malware applications, but I don't believe any are persistent, and you can keep the phone permanently offline.

Using 3rd party wallets seems to be secure at the first view but if you dig a bit deeper you will recognize more the technical thing about it.

The basics are about the blockchain. If you have Bitcoins they aren't stored "at your wallet". This is not possible, it's about the blockchain where everything ist saved. So it's only the way you access your Bitcoins at the blockchain. For getting access to your coins you need the public key and the private key. You can use different ways to do this, one of them is to use a 3rd party wallet. A 3rd party wallet means they held the private keys of you and if the 3rd party gets hacked, you will be affected. Most services offer a cold-storage wallet to secure this (private keys are held offline by the exchange) but after all you have to trust the 3rd party.

Another risk is to get phished, when you log in and if your account is compromised, the hacker can access your Bitcoins - you can't do anything.

It's better to use your own, private Bitcoin address, a 1st party wallet. Here only you know about your private keys. Keep them secure and don't tell anyone about it. Save them on a piece of paper and please don't store them at your computer, especially when you are online. A first party wallet can be a desktop wallet, a hardware wallet or a paper wallet. If you do no mistakes these options are very secure. For a long term-storage a 3rd party wallet is not recommended. Remember the hack of Mt.Gox. The best option is to use a 1st party wallet for this - be your own bank  

If you use a 3rd party wallet (like an exchange for trading (Binance) ord to buy Bitcoins (coinbase)) please keep the amount you held there as low as possible and send coins you don't need there to a 1st party wallet.

Another thing is about ICOs and if you participate in an ICO please don't use an ETH wallet you have no private keys from. You can only access your tokens if you have the private keys. If you use a 3rd party wallet you won't have access to your ICO token. The private keys are held by the exchange and the only possibility is to contact them to send your tokens to another wallet (what is very unlikely because of the cold storage). In 99% of all cases they won't do anything. For ICOs please avoid using a 3rd party wallet, where you won't have access to your private keys.

Had a bad experience using Jaxx wallet on my iPhone.
First of all i didnt write down my secret phrase somewhere, cause didnt think
ill be using it constantly (yeah, i know how stupid i am). Specified it as one of the wallets on my GPU Farm pool.
After 2 months, when i had about 1 ETH on it, my phone was stolen.
Ive purchased a new one and installed a backup of previous phone with Jaxx wallet on it.
To my surprise backup didnt contain my wallet, so all my crypto was completely lost..
So, write down your secret phrase if you dont want to be on my place and dont rely on
phone backups

Anyone using 3rd party wallets wants to be very careful indeed.

Cyber crime is getting more sophisticated by the day. Trying not to repeat the other guys on here by the way.

I seen something a while back about how theres HUNDREDS OF MILLIONS of people worldwide have downloaded supposedly friendly apps like Emoji keyboards and other 'cute' looking apps that we all think are harmless are just infact riddled with spyware/malware. This is just to spy on peoples everyday activities! so when Bitcoin rose in price this is effectively a cyber criminals lottery!

When some unsuspecting poor soul types in their most precious characters into their phone- the ones that hold the keys to their BTC/crypto- whoosh- keyloggers have grabbed your precious data and your Bitcoin sits on the proverbial lap of a cyber crook! Don't want to start an Android vs Iphone debate here...but Androids are more prone to this sort of thing! 

ANY crypto exchange you have funds on is essentially a 3rd party wallet and at risk of an attack, and although i'd expect an exchange like Binance to be Super-secure, if they were to lose everyones funds (worse case scenario) would you be getting reimbursed? Possibly- but I'm not so sure! On a smaller exchange i'd say its little to no chance.

I'd say this is one of the reasons a LOT of people are yet to dip their toe into the crypto waters, and perhaps one of the reasons i'd not be so sad to see some form of regulations come into place where the exchanges/wallets are held accountable. Until that happens crypto will be like the Wild West as criminals exploit the vulnerabilities.

I'd like to see multi layer security - way beyond 2FA. I think the first company/product who simplifies this and makes the UI super user friendly (for anyone with basic knowledge of tech) are in for a very bright future! 

Here are some of my opinions, and please correct me if I am wrong.

I consider anything other than a core wallet to be a 3rd party wallet.
Not all wallets offer exchange facilities.
Not all wallets are stored on the web, but obviously you will need web access to make and receive payments.
Some wallets store balances like a bank, and you don't own specific Bitcoin transactions with them.

First of all, thank you for this discussion and opportunity to earn merits.

I would like to start off with the definition of third party wallets. I see them as digital wallets that are created by developers who are not part of an official team of a project. Hope that brings us on the same page.

Now, the dangers of using such third party wallets that are created by a non-official team member is:

1) Data Leak

Given the recent personal data protection movement on EU GDPR, data is a very important asset nowadays. There have been many cases where personal data was misused and not properly handled, even to the extent of selling off for profit. So, when using a third party wallet, we need to be cautious what information we're actually providing to the developer. The worst case is when your password is being collected in plain text and given "voluntarily" to the developer. It may be used against you as a form of identity theft.

2) Misappropriation of funds

If you're dealing with large amount of digital money, you should most definitely choose to work with official wallets. Because third party wallets may not be who we thought they should be. What if our funds that are transferred to "our" third party wallets are re-directed to someone else's wallets. We don't know how it works behind the scenes unless the third party wallets are open-source, and we can audit the code somehow. If not, that's a risky move.

3) Compromised System

The worst that can happen is when the third party wallet is actually running some sort of malware that compromise your system and stealthily monitor your activity and every surfing habits including your digital login and transactions, then sending all that information to the developer or in this case, most likely a hacker.

There are lots of problems and risks involved when dealing with third party wallets. But, these are the three dangerous things that could ever happen to someone. Therefore, I suggest to minimise and mitigate such risks, it's better to use official wallets that the project team announced. At least, we know the team is going to take responsibility on what's going to happen.

Of course, as humans we always need to take one step further in ensuring our safety, if not who would bother helping us except ourselves? I always use a VPN whenever I'm connecting to the Internet. This protects my traffic data by encrypting it before sending out of my devices over the network. Certainly encryption can be decoded, but at least that adds another layer of protection that's better than sending plain data that attackers can sniff over a public network.

Hope it helps.

I think if we choose a 3rd party wallet for storing cryptocurrency means we are giving away security liability for a 3rd party. Also centralized wallets are more desirable to hacking and can be theft whole funds by wallet provider itself. The best solution I believed is the enabling some system which requires multi - signature and two factor authorization for wallet transactions.

Btw "mitigation is better than adaptation" so I would rather go for cold storage wallets rather giving sole authority of my funds to any 3rd party wallet provider.

1.3rd party wallet are vulnerable to being hacked,and at that time nobody take the responsibility and there is no proper reason,

2.your key is not only with you like Pvt wallet,it is also with exchange,so it is risky,

Way forward,

Use hard or paper' or Pvt wallet....

Didn't knew Electrum stored my private key online  . (They don't, obviously.)

Also, isn't every bitcoin wallet a third-party wallet? (With the exemption of Bitcoin core maybe..)

I doubt many of us here have compiled/compile/code their own wallets.

Your private key is stored online and you lose your money if the exchange/wallet is compromised. If you can't access your private key then the coins that you store in a 3rd party wallet is not your money. Worst case, they'll gonna declare bankruptcy and your funds will be gone in seconds.

risk:

1.there is no transparency in using the third-party wallet.
2.High transaction fee,
3.they can know about your personal details (KYC REQUIREMENT), they can be misused,
4. If you secure wallet with Google Authenticator other, if you lost your phone, then difficult to recover the account.
5. Volatile to hack

suggestion...

1.keep your coins in the Pvt wallet or hard wallet,
2. Use the third party only for the trading time, trade and send to the pvt wallet,
3. Never use autosave password for login,

Since this is the forum for beginners, maybe start by defining what a 3rd party wallet is...  

As far as I know about it, third party wallets are centralized wallets. Most of them needs KYC for you to be able to withdraw/deposit certain amount. Since 3rd party wallets is an exchange as well,there's a higher risk that your hard earned crypto will go down the drain if the exchange is hacked. We all know that there are lots of money in an exchange so it is vulnerable to certain attacks and the possibility of them selling your personal information is also some risk that you'll encounter in using such wallets. There's also the risk of not being able to withdraw from your wallet if they've found out that the coins that you are using came from gambling sites. Really depends on the country where you live in if gambling online is illegal or not.   

I think using 3rd party wallet is like having a gatekeeper to your coins.
It is best to have total control of your asset than having a third party doing it for you.
The danger I can think is that the data you stored in third party can be hack and there's nothing that could protect you from that.  Many online wallets & app wallet are fakes it is dangerous especially for beginners.
Your wallet is like your own bank and you should have a total control over it

I'm going to give you a merit for that. I think that the point you are making is that if you use public WiFi to access a 3rd party wallet, you should make sure you clear cookies, and you logout, and don't leave your password stored in a public computer.

I'd also add that you should log out if you go to the 'loo. Leaving the computer logged in to your account is the same as leaving your open wallet on the table.

@poptok1 I'm really trying to show new and junior members that they aren't ignored when it comes to awarding merits, but you make some valid points, so I gave you a merit as well.

The dangers in using 3rd party wallets:
+ Trusted: How you can trust a 3rd party wallet ? Are they legal ? Its not 100% of safety wallet from 3rd party. You shouldn't give all your money to other who is not legalize themself to community and public law.
+ Control: As a bank, your money will be control by them in their wallet not your wallet because you use their wallet so they also need an official wallet to store all token/coin.
+ Securitt: What happen if 3rd party wallet get hacked ? Are you sure they get hacked ? Or its what they say to you. Its hard to identify it.
+ Transparent: Normally, 3rd party wallet is created by private company, so it isn't allowed to public what is behind their wallet. You don't know its safe or not.

Minimise the dangers in using 3rd party wallets:
+ You should use 3rd party wallet that is created and built by community not a private company, so all code/data are public and show to everyone. You can contribute your knowledge to build wallet more safety and trusted.
+ Don't put all your coin/token in one place.

As a newbie, its what i know about using 3rd party wallets. But i wonder why people use 3rd party wallet when official wallet is available to everyone

Based on what i understand is that, third party wallet are web wallets, and web wallet is also an exchange wallet. and most of the time third party wallet is usuable and free.

But the danger i see is, there are local user,  who wants to access the wallet in public places like what do we call computer/cafe shop,( i'm not sure what that is but it's near to it. ) some users don't know that the information they log in can be seen through cookies. And most local users don't know how to use  incognito mode, they always leave history.  
 
The only way to minimize them is to use private networks or use incognito tab.  Sorry new to it.  

-----
Edit.

What you said  is what i want to say, you just made it clear.  Thanks.

Certainly not a new member here but I think there will be no harm in bumping this topic.
My advice regarding the usage of third party wallets will be super simple, avoid android based devices as your main wallet.
I think that there is no need for a prove of how many malware applications this system is currently vulnerable to.
So, should anyone be worry about cell-malware? With a little bit of awareness, some basic anti-bugs tools on your phone and by your side, you can keep malware and other mobile threats at bay. Better safe than sorry so I would recommend not to install Bitcoin themed apps, such as price tickers, live charts, wallet monitors etc.

I need to give away some more merits, so I'm going to award merits to new and junior members who post in this thread about the dangers in using 3rd party wallets, and how you can minimise them. Don't copy previous posts, and don't plagiarise.

I've made this thread self-moderating, and I'll delete any references to bounties, airdrops or other spammy topics. This isn't a thread to push the benefits of any specific wallet either, so please keep topics to a general format.