Similar to how you store your fiat currency in your wallet, cryptocurrencies are also stored in their own special ‘digital wallets’.
But how do you store something digital? Well, when you create a new crypto wallet, there will be two lines generated. These are known as addresses, or keys.
1. Public address – This is what you give to people/exchanges to make deposits into your account. Think of it as your bank account number, there is no problem with it being public.
2. Private/Secret key – This is what you use to access and spend your coins in the wallet. Think of it as your bank account PIN/password. If someone has access to this key, they can withdraw all of your funds. Like, ALL. EVERYTHING. And chances are, you can do nothing about it, due to the anonymous and unregulated nature of cryptocurrency. That is why people take great effort in ensuring they store their coins securely.
Most of the time, each coin has a specific wallet and address type, unless otherwise stated. You CANNOT send Bitcoin to an Ethereum address, and vice versa. Each coin will have its own blockchain, or network. Regardless, the client should recognize it as an invalid address and reject the transaction, should you make the mistake, due to different coins using different prefix bytes. For eg, Bitcoin addresses start with a ‘1’, whilst Litecoin addresses start with an ‘L’. Under the rare case that the transaction does go through, it would be virtually impossible to get the money back.
What is a Hot Wallet and Cold Storage?
Hot wallet refers to any cryptocurrency wallet that is ‘online’, or connected to the internet. Generally hot wallets are easier to setup, access, and accept more tokens. But, hot wallets are also more susceptible to hackers, possible regulation, and other technical vulnerabilities.
Cold storage refers to any cryptocurrency wallet that is ‘offline’, or not connected to the internet. Generally cold storage is more secure, but hard to set up and access, and they also don’t accept as many cryptocurrencies as do many of the hot wallets. Cold storage devices like the Ledger Nano are also expensive, whereas hot wallets are free.
There are 5 main types of wallets:
1. Desktop (Hot Wallet)
2. Mobile (Hot Wallet)
3. Web (Hot Wallet)
4. Hardware Wallet (Cold Storage)
5. Paper Wallet (Cold Storage)
Disclaimer: Some examples of each wallet type will be provided below for your reference only; I am in no way related to them, and not necessarily recommending that you should use them. Do your own due diligence and use at your own risk. I will not be liable for any losses incurred.
1. Desktop Wallets
These are software that you install on your PC, which usually have very simple, intuitive interface and makes it relatively easy for users.
- Easy to setup
- Some can support multiple coins
- Simple interface and easy to use
- Your computer can be easily hacked or infected by a virus, which may lead to your wallet being hacked
- Restricted access as you can only use it on your computer (no access when you’re outside, unless you have a virtual machine)
- If the Desktop Wallet is not open source, then the developers can potentially insert malicious code into the software
*There are usually custom desktop wallets for each own coin, so check out the individual coin webpage for more info.
2. Mobile Wallets
These are the same thing as ‘Applications’ that you can install on your mobile phone. Mobile wallets are great because unlike a desktop, you carry your mobile phone almost everywhere with you. This means you can access it all the time. As long as you have your phone with you….
- Easy to install and use
- Easily accessible
- Usually supports multiple coins
- Susceptible to ‘mobile viruses’ and snooping by people around you
- There’s also a chance that you lose your phone and someone else gets access to it
- Usage limited to your phone battery, if you don’t have a means to charge it for some reason
- If your phone is spoiled, you lose access
3. Web/Online Wallets
Web-based wallets store your private keys online on remote servers, similar to a cloud (think Dropbox or Google Drive). The advantage is that you can access them from anywhere regardless of the device you are using (desktop is tied to the computer, and mobile is tied to the phone), as long as you have an internet connection. You will surely use these across your crypto journey as they are an integral part of online exchanges. The huge downside is that you don’t have full control over it and the organisation running the website/cloud/server can suddenly disappear or take charge of your private keys/cryptocurrencies.
- Easy to setup (usually you will have them all set up when you create an account on an exchange)
- Easily accessible from anywhere as long as you have an internet connection (not tied to a device)
- Usually supports many coins
- Susceptible to hacking, sudden ‘account closures’, and/or the organization disappearing
- Withdrawals might sometimes be locked due to ‘maintenance’ or other reasons, so you may not be able to pull out your coins if you wish to do so
4. Hardware Wallets
Hardware wallets are securely programmed devices that store your private keys and never reveal them, and are one of the most secured methods at the time of writing. The private keys are often stored in a protected area of a micro-controller and cannot be transferred out of the device in plain text. Hence they are never exposed to your computer. It is also immune to computer viruses, and much more easier to use (plug and use) compared to a paper wallet. Most hardware are also encrypted with PIN numbers so that adds extra security.
Also, in the event that you lose your hardware wallet, there are backups available to restore your balance on another wallet, using the pass phrases you set up while initializing, or using other BIP39/BIP44 compatible software such as Electrum to recover them. Without the PIN code, a thief cannot access your coins so you don’t have to worry about that as well.However, that’s not to say they are 100% secured and fail-proof.
How a hardware wallet could fail to protect your Bitcoin:
1. Malware swaps recipient Bitcoin addresses: a hardware wallet won’t protect you from being tricked into sending Bitcoin to the wrong address. For example, malware on a PC could monitor for high value transactions and then swap out the recipient’s authentic Bitcoin address for an address controlled by the attacker.
2. Insecure RNG (Random Number Generator): hardware wallets rely on the security of an RNG, often embedded in hardware, to generate your wallet’s private keys securely. Unfortunately, RNG is RNG. Being random, wallet keys can be recreated by an attacker, by generating psuedo-randomness that would seem statistically indistinguishable from true randomness yet still be predictable to an advanced attacker.
3. Imperfect implementation: Bugs at the software, firmware or hardware level may allow attackers to hack in or insert malicious code, leading to a compromised wallet.
4. Compromised production process: Software/hardware implementation during product may be compromised, intentionally or unintentionally (backdoors, bugs, malicious code etc)
5. Compromised shipping process: a compromised fulfillment/shipping process may substitute or modify secure devices for superficially identical but insecure replacements. There was a famous case on reddit where someone bought a Ledger Nano off ebay, which was apparently sealed with the recovery seed words, and he thought those were official. But the device was already initiated by the seller, and he printed the words to trick buyers into thinking those were original, when the seller had already knew the recovery seed of the device. Needless to say, that poor guy lost all his coins.
- Relatively one of the most secure methods still. At the time of writing Jan 2018, no known incidents of coins stolen from a hardware wallet.
- Can host multiple cryptocurrencies together
- Backup and recovery available
- Must be connected to a device (desktop) to use (restricted access)
5. Paper Wallets
Last but not least, paper wallets! As the name implies, it has to do with paper, because it’s either written on printed on paper. Paper wallets are one of the most popular and cheapest options for storing your cryptocurrencies. The main advantage is that the private keys are not stored digitally anywhere, and therefore are not subject to standard cyber-attacks or hardware failures. How safe is it depends on how you manage them.
Basically, you go to a paper wallet generator (or you can google yourself, or use the coin’s own paper wallet generator at their webpage), choose the correct coin currency, generate the wallet offline, and then either write the public/secret keys down on a piece of paper. To prevent the ink from running in case it contacts water, they are usually written in ball-point ink and sealed in zip lock bags or laminating it. They have further detailed instructions on the page itself if you need more help.
You can also print it out (on laser printers instead of ink-jet printers because ink-jet printer ink can fade over time!), by selecting the “Paper Wallet” tab to get a nice sleek design for you to print out and fold.
Some print multiple copies and hide them at various places. Some will go to large extents to ensure their keys are secured, for eg, generating on an old, ancient computer, or using guest mode and incognito to generate and then deleting the cache and cookies, and then restarting the PC before even connecting back to the internet. Some even throw the PC and printers away after generating the keys! Keep them in a fire-proof safe, or at the bank vault, whatever works for you.
- Very secure, almost impossible for hackers to get your info if generated and stored properly
- They are not subject to malwares and keyloggers
- You don’t rely on a third party’s honesty or capacity to protect your coins
- You won’t lose your coins when your device break
- Very tedious to set up
- One address per coin type. This means if you want to store 20 different coins on paper wallet, you need to do this process 20 times, generating 20 unique addresses (ensure you choose the correct coin each time)
- Vulnerable based on where you store them. A flood or fire can destroy them, a thief or someone may get access to it accidentally or purposely. Your mother may accidentally throw it away, your dog may chew it up, or it may get lost while moving house, etc. Ink may fade over time if not prepared properly. Plenty of possibilities, BUT STILL, much lower chance than your PC being hacked and your coins stolen
- Hard to use (not user-friendly to spend the funds and sweep them out, might result in potential losses if done incorrectly). Good for hodling, but not if you’re into short term trades and flipping.