You’ve bought your first bitcoins and have become a proud owner of cryptocurrency. Great!
But here comes the most important thing to consider – how to store it safely and protect it from foreign intrusions. The prime responsibility of crypto safety lies with the user since it has different levels of protection and user security compared to other stores of revenue, say bank or Demat accounts.
Loss of user authentication to an account could mean permanent loss of access to the crypto one has purchased. To dig further into wallet security, let’s first delve deep into what crypto wallets exactly are.
What are crypto wallets?
Cryptocurrencies that are not owned by anyone are otherwise stored on the blockchain. When a user purchases cryptocurrencies in his name, they get transferred to his wallet. The user can buy, spend, trade, or invest in various cryptocurrencies using a wallet.
The pressing need for Crypto-Wallet Security
The absence of a central governing body results in certain advantages, including a reduction of processing fees and an expedition in the transfer of funds. With that being said, digital cryptocurrency balances are still in grave danger of completely getting decimated by a systems crash, an unexpected hacking/phishing attack, or other contingencies.
Types of crypto wallets used to store coins
- Custodial Wallets (Third-Party Wallets)
Usually considered the default option for crypto storage, custodial wallets enable a third party to hold crypto for the end user. It may either be possible through cold storage, hot storage, or a combination of the above two.
When a user buys coins from cryptocurrency exchanges, they usually transfer them to a custodial wallet that they have control over. Transfer of coins to a user’s wallet is common, but not every crypto platform allows it – some support only trading of the same.
The best part about this wallet is that access to crypto is never denied until the user has full access to his account. However, the security measures adopted by this wallet need to be robust since the controls of crypto lie with a third party.
- Cold Wallets (Hardware Wallets)
An offline crypto wallet is known as a cold wallet – usually found in a form of a hardware device. They connect to the internet during cryptocurrency transactions but are stored offline otherwise. A temporary address is generated at the time during which the hardware wallet is connected to the computer.
In the case of loss of hardware wallet, a recovery seed is generated which allows timely recovery of the data. Many users prefer cold wallets to keep their crypto safe as the best option from a security perspective since it cannot be hacked or stolen when it is offline. However, users may have to deal with slower process times as compared to online wallets.
- Hot Wallets (Software Wallets)
An online cryptocurrency wallet is known as a hot wallet – usually in the form of websites or mobile apps. They provide free, undivided access to a user over his crypto and are easy to use from the perspective of an end user. Although these wallets too, come with a recovery phase; problems of hacking do arise, but can be easily mitigated by exercising due care and caution.
Here’s a screen grab demonstrating the recovery seed: -
Safekeeping Cryptocurrency Wallets – For Individual Users
Apart from storing their cryptocurrencies in a safe place, users also need to look out for potential hackers who could trick users into sharing their login credentials. Also, they can be tricked into investing in various fraudulent scams unknowingly or asking for access to their account to carry out phishing of stored coins.
The best option for a user is storing the majority of the long-term invested coins in a cold wallet and transferring it into hot wallets as and when its use is warranted for. Seed phrases should also not be stored on an internet-connected device as they become vulnerable to data theft and privacy breaches.
Multi-factor Authentication (MFA) can also be used to add layers of protection to a wallet storing coins of high value. Strong passwords set by the end users are instrumental in avoiding many security breaches over time. The user also needs to be informed of various situations where they might be tricked into sharing user access or promising fake inflated returns on a shady investment. Public Wi-Fi should never be used while dealing with such digital assets.
A scammer may also impersonate the user’s identity by gaining access to his account and breaking open his existing accounts or starting false accounts newly in his name. A user must always be vigilant enough to identify scam calls and e-mails and not click on any suspicious link that connects the wallet to an unknown website. Regular backups of wallets must be taken and stored on multiple trusted servers.
An illustrative example of how multi-factor authentication works: -
Safekeeping Cryptocurrency Wallets – For Corporate Users
Multi-signature vaults are a unique form of an added security layer that can be unlocked only with 2-3 keys possessed only by trusted employees. This helps with added security even if one of the existing keys is lost or compromised. Websites need to be double-checked for security so that the end recipient doesn’t belong to a malicious attacker.
In the case of organizations, deploying least privilege principles in which employees are given only the required bare minimum permissions for their allotted work and no more to the cryptocurrency information systems can also drastically improve security. Seeking the help of an outside expert to identify risks & control deficiencies and measures to mitigate the same can help the organization avoid system flaws that might potentially be overlooked/underestimated by staff otherwise.
The organization can also avoid information spillover from decentralized devices like servers, hard disk drives (HDD), and removable storage by providing the designated employees with access to tools that perform secure deletion of confidential data after its purpose is served.
The Final Verdict
There exist a few users who tend to always feel insecure and thus go to the greatest lengths to secure their wallets and crypto coins contained in them. However, it may not be ruled out that the user tends to lose wallet access to these third-party security tools if the credentials remain unverified.
Losing access to crypto wallets, albeit temporarily or permanently is as common as hacks. A user should not overcomplicate his account security and achieve symmetry between complexity and security.
The skill of balancing crypto wallet security alongside crypto investment skills is critical to master on the pathway of excelling in crypto investing. The sooner an investor learns it, the better.