Types of bitcoin and cryptocurrency wallets and it's risksby
cryptosec.info When investing in bitcoin or cryptocurrencies in general, wallet security should always be a number one priority, to prevent unnecessary losses to one’s investments. Having your investments stored on an unsecure manner is simply a disaster waiting to happen.
No matter how good you are at picking great coins and tokens, or on how good you are at timing the markets, none of these matter if your funds aren’t secure to start with.
Listed below are types of bitcoin and cryptocurrency wallets and the risks and advantages of using them.
Cryptocurrency Exchanges (Risk level: high)Storing bitcoin and cryptocurrencies on exchanges are mostly done by the people that are quite new in the cryptocurrency space. Why not, right? Exchanges like Bittrex and Binance can hold up to more than a hundred different coins and tokens anyway. Great! all my coins on a single account! No. Just, no.
Some people usually think of some of the best exchanges as being sort of “super secure“, “unhackable” or something along those lines. But the fact is, there’s no such thing as an “unhackable” website or system. Some websites like Google and Facebook are just significantly more secure than other sites, but the possibility is still there.
People in the past probably thought the same way with the famous Mt.Gox exchange in 2014. People left their funds on Mt.Gox thinking it was sort of “unhackable“. Guess what happened? Mt.Gox has been hacked for around 100,000 bitcoin; then filed for bankruptcy months later.
Wikipedia link for more infoDon’t let history repeat itself. Only use exchanges for what it’s intended for: only as a platform for trading and exchanging cryptocurrencies, and NOT as a long-term storage of your funds.
Online/Web Wallets (Risk level: moderate)So you’re new to bitcoin. You’re looking for a wallet for your mobile phone, so you open up the AppStore or PlayStore. You type on the search bar: “bitcoin wallet“.
What comes up? Coinbase. You say, “sure, why not?“, since you commonly see people talking about Coinbase on social media anyway, or probably FreeWallet because it has a good number of downloads and it looks fine.
So this means that these wallets are good choices, right? Not necessarily.
Online/Web wallets are wallets whereas you can access your funds by logging in to a website/app using a username/email address and a password; and usually with most web wallets, they don’t give you access to your private key(s). Instead, they are stored somewhere online and is only accessible by them. If you haven’t realized by now, your private keys stored online on a company’s servers is a huge security risk as it can potentially be accessed by hackers.
Another risk with most online/web wallets is that they can revoke your access to your wallet. How? They simply disable your account, and there’s nothing you could do about it. While they most likely won’t randomly lock up your account, the risk is always there.
Not your keys, Not your bitcoin” – Andreas AntonopoulosSome of these online/web wallets like Coinbase definitely provide very good service by allowing us to easily exchange our crypto for fiat or other cryptocurrencies and vice versa, or by giving us fee-less transfers from Coinbase <-> Coinbase wallets, but it isn’t really advisable to hold big amounts on these wallets. Just as you wouldn’t carry probably more than $500 on your physical pocket wallet on a normal day. Instead, you leave majority of your money on a fire-proof safe or in your local bank. Same thing should be the same with your cryptocurrency funds.
Software Wallets (Risk level: Low-moderate)Software wallets are wallets whereas you download and install a certain program/app to your computer or mobile device.
So, pretty much the same with Coinbase right? Nope.The main difference people might notice straight-off with software wallets like Electrum and Exodus is that most software wallets doesn’t require a user login. Why? Because with software wallets, your private keys are not stored on the wallet’s servers. Instead, your private keys are only stored locally, on your device alone. Granting you complete and total control over your funds.
There are still risks with software wallets though, as certain computer malware/viruses might be able to access your wallet’s private key(s), hence potentially stealing your cryptocurrency investments. It’s the responsibility of the wallet owner to make completely sure that the device being used is free from malware and viruses.
Hardware Wallets (Risk level: Very Low)Hardware wallets are wallets whereas your private key(s) are only safely stored on the hardware device itself, and never leaves the device even if you make a transaction. Hence, even if transacting on a malware-infected computer, the chances of hackers gaining access to your private keys are pretty much almost next to zero. Making a hardware wallet a really ideal way of storing bitcoin or other cryptocurrencies, having a good balance between security and convenience.
The problem here is that hardware wallets aren’t that cheap. Hardware wallets can be a bit expensive for most people, but if you’re holding at least worth $1000+, getting a safe and reputable hardware wallet should be one of your main priorities. Better to spend a hundred dollars on a hardware wallet than to risk your funds from getting locked or stolen.
Planning on grabbing a hardware wallet? What hardware wallet should you get? As of now, the two most reputable hardware wallets are still the Ledger Nano S and the Trezor, both small end compact enough to fit in your pocket.
Paper Wallets (Risk level: Very Low)A paper wallet is a wallets that, you guessed it: private key(s) that are printed on a piece of paper.
Paper wallets are a good alternative to hardware wallets as you only need computer device(s), a reliable printer, and some paper.
Paper wallets are really easy to make, but are quite difficult to make in a secure manner. Take note that it’s really not advisable to use paper wallets if you don’t have the knowledge to create one securely, in a way whereas hackers have no way on stealing your private keys(s) due to removing all access to the internet and to any other device. Simply right-off printing a paper wallet from your personal computer without taking huge amounts of safety precautions may end you up having a very unsecure paper wallet, potentially even more unsecure than a web wallet. If you’re not sure how to make one securely, don’t risk it. Go the safe and easy route and purchase a hardware wallet instead.
Also take note that paper itself is very prone to damages. Simply just soaking your paper wallet with water may make your cryptocurrency funds inaccessible; so always make sure to store your paper wallets on somewhere safe and dry.
Disclaimer: CryptoSec.info is a simple website made to help beginners in the cryptocurrency-space by giving them sufficient knowledge on protecting their crypto investments, and learn about the risks they're taking when using certain wallets and or services. Guides by cryptosec.info:
