How to Keep Your Cryptocurrencies Safe
A practical introduction to cryptocurrency wallets and security best practices
Over the last decades, the money we use to make transactions, namely fiat currencies, has been mostly dematerialized. Bank notes have gradually turned obsolete while most of our cash assets have been migrated on digital accounts, usually hosted by bank servers. Under that centralized system, the bank has full control over your data and funds and is in charge of ensuring your account’s security.
Until 2009, for those who didn’t want to put their money in the hands of someone else, the only alternative was to stick with bank notes — which was still highly risky and not very convenient. Then, Satoshi Nakamoto created Bitcoin and the era of cryptocurrencies started…
With cryptocurrencies, money is still dematerialized. However, digital accounts data is no longer stored on servers owned by a central entity but is rather distributed across multiple machines, operated by independent actors (network nodes). That decentralized network forms a blockchain. In this system, security is managed by the blockchain design structure and algorithms which users interact with.
As a cryptocurrency user, I believe it is important to:
- Understand how to properly interact with blockchain with a cryptocurrency wallet.
- Get familiar with security best practices to avoid most common blockchain-related hacks and scams.
For those interested in cryptocurrency investing, I’ve also written a complementary article about my personal tips and tools to buy at best rates, earn passive income, minimize risks, …
What is a cryptocurrency wallet? 💼
A blockchain account is associated with two elements:
- A private key —a long hexadecimal digit which enables to authenticate yourself as the account’s owner and prevents others from impersonating you. That is a kind of password providing access to your personal funds and allowing you to confirm transactions.
- A public key — another long hexadecimal digit, generated from your private key via a specific algorithm. It is the account address you used to receive/deposit funds — in the traditional banking system, that would be your IBAN.
A public/private key pair represents a cryptocurrency wallet, it is what allows you to interact with your blockchain account. As their name suggest, the public key can be shared with anyone (that person will only be able to send you funds) whereas the private key should be kept secret (that is the password to access your account and confirm transactions). Obviously, it is impossible to retrieve the private key from an associated public key.
Now, a wide range of cryptocurrency wallets exist on the market… the question is how to distinguish them and eventually select those that’s the most suitable for our needs (depending on our investor profile)?
First, let’s look at two main features characterising a cryptocurrency wallet: private key ownership and internet connection.
Two main features of cryptocurrency wallets 🔍
1. Custodial VS. Non-custodial
The first and most important feature to look at is the private key ownership. Let’s keep in mind that anyone who knows your private key has full control over your funds.
Therefore, when you select a wallet, it is important to know who holds your private key. Basically, that person can be you (non-custodial or decentralized wallets) or the wallet provider (custodial or centralized wallet).
Custodial solutions are close to today’s banking system in the sense that the wallet provider has full control over your funds and acts as an intermediary agent when you perform transactions. When using that kind of solutions, that means you must trust that third party.
On the other hand, non-custodial solutions are structured and operated by smart contracts which enable peer-to-peer transactions, without any intermediary agent. That means you are fully in control and responsible of your funds: you are your own bank.
For more information cf. Custodial VS Non-Custodial Wallets.
2. Hot VS. Cold
Wallets constantly connected to Internet (eg. web platforms, mobile apps) are called hot wallets. By contrast with cold wallets (eg. hardware devices) that are most of the time disconnected from Internet.
Hot wallets usually offer higher quality services (better user experience, easy and quick transactions, passive earnings options, …) but are more exposed to cyber-attacks. In this regard, cold wallets are considered much safer.
For more information, cf. Crypto wallet types explained.
How to select your wallet(s) wisely? ⭐
When selecting your wallet, you can basically choose between the following three types:
- Custodial and hot — most flexible and advantageous option (competitive passive earning rates, derived products, crypto cards, …). Big players include Crypto.com, Binance, Swissborg, Coinbase, …
- Non-custodial and hot — intermediary option, being quite safe while offering flexibility and advantageous options (eg. staking, passive earnings). These are mostly desktop or mobile apps, such as MetaMask, Trust Wallet, Argent, …
- Non-custodial and cold — safest option (high security standards) but not flexible (not suitable for high frequency trading). These are mostly hardware wallets such as Ledger or Trezor.
Now, from a security point of view, using one single wallet is risky: even if the wallet itself is highly secure, there is always a chance that something goes wrong (private key loss, hack, cyber-attack, …). With this in mind, it can be smart to split your funds in multiple wallets, especially when you’ve made significant investments.