Keeping the cryptocurrency wallets secure is very important for all those people who are going to use various crypto wallets for the first time and are unaware of security risks related to crypto wallet usage.
As a beginner in cryptoverse, you must understand that if you want to send, receive or simply store your cryptocurrency, you will need a Cryptocurrency wallet. Crypto wallets also help you safeguard your digital currencies from possible crypto hacks. But, that doesn't mean crypto wallets are completely secure for you.
Many naive crypto wallet users trust the promise of blockchain technology in creating a secure system for users where someone can't hack into your cryptocurrency and steal it. Blockchain is indeed a model of internet security since it is underpinned by a distributed ledger that creates a chain of immutable records.
But, you must know that the security promise offered by revolutionary blockchain tech doesn't automatically apply to your crypto wallets. There is a surprising risk associated with crypto wallets usage and this is not because of blockchain. In most cases, the security risk related to your crypto wallet arises because of your wallet or exchange provider. Wallet providers often track the information you provide to them while signing up.
As competition is continually growing among crypto wallet solution providers, companies seek more information about their customers so they can provide more personalized product offerings. Similar to digital wallets in real-world, tracking software is used by many companies in their crypto wallet solutions today to seek information about crypto wallet users - their search history, email or web activity information so they can identify what customers actually want and can deliver the exact results.
This means the secure private keys generated by users of crypto wallets are also not secure. Combining the information traced by marketing companies and data collected by wallet solution providers, hackers can easily sneak into your crypto wallets.
Hence, it is very important for beginners in the crypto space to take full responsibility for safeguarding their funds stored in the crypto wallet.
To help you achieve this, the article would highlight the key security issues and risks related to crypto wallets usage, how to choose a crypto wallet safely and key measures to safeguard your crypto wallet funds.
But, before moving on to the actionable insights related to how to make you cryptocurrency wallet secure, let’s first try and understand what is a cryptocurrency wallet and how it differs from a digital wallet or eWallet:
What Is a Cryptocurrency Wallet?
A cryptocurrency wallet is a software program, designed to store the private and public keys as well as interact with various blockchains, ensuring users can exchange digital currency and monitor their balances easily.
In other words, a crypto wallet allows a particular user to send/receive or exchange bitcoin and other popular cryptocurrencies with others easily. If you want to send/receive bitcoin or any other altcoin, you simply need a crypto wallet.
How Does It Work?
Now, that you have got the basics covered, let’s understand how crypto wallets work:
Unlike the real-world physical wallet, your cryptocurrency is not stored in the digital wallet in a physical form. Instead, it is digitally stored on the blockchain - a revolutionary,
ground-breaking technology that contains an immutable, circular record of every single transaction incurred on the network, including the total account balances held by each wallet address. The software inside the crypto wallet is directly linked with blockchain and allows you to submit transactions on the blockchain ledger. The wallet is responsible for the generation of public and private keys for you, without which you won’t be able to access or transfer funds.
So, whenever you send bitcoin or any other cryptocurrency, you essentially transfer the ownership of your wallet coins to the other wallet address where the coins are being sent. To access and unlock the funds, the recipient wallet owner must have the private key linked to its wallet address and it must also match the public key/address where you have sent the coins. Remember, no actual exchange of real coins is done here and the transaction will only be recorded on the blockchain along with an update in the crypto wallet balance of you and the receiver.
In layman terms, you can consider the public key of your wallet similar to your bank account number with private key functioning as its PIN without which you won't be able to access or transfer funds from your account. Similarly, in the cryptocurrency world, the private key is used to prove ownership of a wallet address as well as sign transactions to send cryptocurrency from your wallet to others. Whereas, your wallet address or public keys are visible on the blockchain network, which enables other users on the network to find your wallet address and send money to you.
What Are the Different Types of Cryptocurrency Wallets?
Crypto wallets can be mainly categorized into two types - hot wallets and cold wallets. The major difference between the two is that the former ones are connected to the internet or are available online whereas the later ones store the user crypto wallet data in offline mode.
Further, these two wallets can be divided into the following categories:
Online/Web Wallets (Hot Wallet)
These wallets are cloud-compatible and are accessible from any internet-connected device from any part of the world. These wallets offer you extreme convenience as you can store your private keys online - which would be secured by a third-party on your behalf. Although, your private keys are at the highest risk of getting stolen online from online due to hacking attacks and theft.
Desktop Wallets (Hot Wallet)
They are generally installed on your computer system or laptop, just like any other software. Although, desktop wallets are at high risk of getting affected by malware or computer virus. You should install strong antivirus and have a firewall to protect your wallet private keys. Popular examples include Jaxx, Electrum, etc.
Mobile Wallets (Hot Wallet)
These wallets run via an app on your mobile and offer extreme convenience as they can be used for instant transfer of payments to anyone, anywhere using virtual currencies stored in your account. Some mobile wallets also have web or desktop versions. Popular wallet examples include Coinomi, Mycelium, etc.
Hardware Wallet (Cold Wallet)
Hardware wallets store user’s private keys on a hardware device like a USB. As users’ private keys are stored in some physical device, they offer the highest level of security and are least vulnerable to online attacks. Many crypto users consider them the safest option to store their digital money. Hardware wallets can be connected to a PC and also compatible with several web interfaces. To send currency from a hardware wallet; you just need to plug your device to an internet-connected PC or device, enter a pin and send currency. Popular examples include Trezor, Ledger Nano S, etc.
Paper Wallet (Cold Wallet)
Similar to hardware wallets, these offer top security and are easy to use. The term paper wallet generally denotes a physical or printed copy that contains your wallet public and private keys. In more technical terms, it refers to a piece of software that is used to securely generate a pair of private and public keys, which are then printed. Using a paper wallet is straightforward for anyone.
How a Crypto Wallet Is Different from a Traditional Digital Wallet/eWallet?
Despite millions of people across the world using cryptocurrency wallets, there is still a misunderstanding when it comes to understanding how they differ from traditional digital wallets:
Let’s understand each in detail:
A Cryptocurrency wallet is essentially a software program that enables users to send, receive or store a myriad of cryptocurrencies or digital currency. It also enables users to monitor their crypto balances. These wallets also store the private and public keys of a user and interact with various blockchain so that users can send or receive cryptocurrencies.
On the other hand, a digital wallet or e-wallet is a software-based program or system that securely stores users’ payment-related information in a secure environment and eliminates the need to enter account information manually for users, every time they make online payments.
E-wallet allows you to store payment details like credit card, debit card information, bank account information, etc. for making faster payments. E-wallets can also work as the main interface for using cryptocurrencies for users if they come with built-in features to interact with various blockchains.
Note: Digital wallets also act as the main interface for using cryptocurrencies like Bitcoin for users if they come with built-in support for crypto storage or exchange.
Here’s the difference:
Unlike digital wallets and traditional “pocket” wallets, a cryptocurrency wallet does not store any currency. All that exists in a crypto wallet is a record of users’ crypto transactions that are stored on the blockchain network - which might be visible or invisible to other users, depending upon the blockchain type - public or private.
Crypto wallets store the public and private keys of users engaged in the crypto exchange. Such a facility is simply available from a typical digital wallet.
Unlike a typical digital wallet, a crypto wallet has an interface that allows it to interact with various blockchain for sending or receiving crypto on behalf of users.
Digital wallets can be linked to a bank’s mobile app or any payments platform like Paypal or Alipay, which is simply unavailable in case of crypto wallets.
Examples of Cryptocurrency Wallet Scams in the Crypto Industry
Now that you are fully aware of the working of Crypto wallets and how they differ from traditional digital wallets, let's look at some of the scams in the crypto industry to give you an idea about the security risks associated with the crypto wallet usage:
The most popular example of a crypto wallet hack is last year’s Binance incident. Apparently, the hackers stole $40m worth cryptocurrency from Binance -the world’s biggest digital money exchanges. Binance reported that cryptocurrency theft was made from a single wallet, which was the company’s own Bitcoin hot wallet. Also, cybercriminals stole the API keys, two-factor codes and other information during the Bitcoin attack.
The other crypto wallet hack incidents include $10m worth XRP steal made by hackers from GateHub users wallet in June, last year. While providing a briefing about the incident, cryptocurrency wallet service reported cybercriminals were able to breach around 100 XRP Ledger wallets to steal money.
A report from Chainalysis at the end of last year highlighted that PlusToken scammers have managed to cash out around $185 million from the total stolen Bitcoin and are also responsible for the steep decline in Bitcoin prices at the end of 2019. Before cashing out money, the hackers made more than 24,000 transfers to 71,000 different Bitcoin addresses using a special kind of wallet that uses a Bitcoin-compatible privacy technology - CoinJoin.
Risks related to Cryptocurrency Wallet Usage
In the case of spoofing, the malware present inside the user system tries to change the sender’s wallet address in an attempt to distract another person to send cryptocurrencies to a wrong wallet address. The crypto wallets with less secure security protocols may often become victims to such hack incidents. Hence, always check the level of security protection a crypto wallet offers to you.
Loss of Funds
As discussed, you need both private and public keys to access your crypto wallet and funds stored inside it. Hence, it is important that you store both keys securely. Keeping private keys in an encrypted form is equally important to minimize the possibility of someone accessing your wallet funds without your permission.
High Transaction Fees
While using crypto wallets, the users also pay to pay transaction charges, which might go up to 50% of the sent amount. Ignoring these things might lead to a big financial loss for you.
You must know that the public address of your crypto wallet is visible on the blockchain network (excluding private ones) that can readily be seen by everyone; hence, your wallets are at risk of attacks from hackers.
While using crypto wallets for virtual current transfer, always remember to enter the correct public address of their receiver, as transactions once performed on the blockchain cannot be reversed due to its nature. You might lose your money as it will be transferred to a wrong wallet address.
Actionable Insights for How to Secure Your Cryptocurrency Wallet
If you love using crypto wallets, here are some of the important safety measures that you should keep in mind to secure your cryptocurrency wallet and funds stored inside:
Keep your Private Keys Secure
Once someone gets access to private keys or passwords of your crypto wallet, your funds are simply gone. So, always remember to store your private keys safely and make sure no one has access to your private keys or wallet password.
In order to keep your private keys safe, follow these safety tips:
Choose a Crypto Wallet Wisely
Always choose a wallet that stores your private keys in an encrypted form online. Crypto wallet solution providers like Corin are offering private key encryption that prevents insider hacking for your crypto wallet. For users concerned about cyber threats, cold wallets are the best solution. You can use cold storage wallets like Trezor or Ledger so that cybercriminals stay away from your funds stored inside a crypto wallet.
Make your You’re using a Secure Internet Connection
Majority of the public networks or wi-fi networks are vulnerable and have security flaws also, which cybercriminals can easily take advantage of for hacking your crypto wallet funds. If you're using a hot wallet to connect to your crypto wallet - avoid connecting to a public network. It is recommended that you use your private or home networks. Also, make sure your private wi-fi uses strong encryption like WPA-2 protocol.
Avoid Phishing - Email and Web
In the crypto world, it is common for hackers to perform phishing attacks through email and Google ads, To avoid becoming part of such phishing scams. Always check the emails that you receive from your crypto wallet solutions providers have their domain spelt correctly and try to avoid logging into their website by clicking on the Google Ads. Remember, once your private key is exposed to a phishing site, your crypto funds are gone.
Cross-check the Wallet Address
Make sure when you connect to an exchange or hot wallet, you're logging into the right address- the one provided by your wallet solution provider. Also, log in to websites only that are using a valid HTTPS certificate. Most legit sites have HTTPS secure. For extra safety, try browser plugins like “HTTPS Everywhere”
Keep an Eye on Auto-updates
It's always recommended to turn off auto-updates while using web apps related to the crypto wallet. The bugs arising in new software updates can cause massive losses for you as a crypto wallet account holder. Wait for 2 or 3 days to track any potential issues in the new release of the crypto wallet app or software. Once the app is tested by other users, you can install it without any risk.
Use Strong Passwords
52% of people use the same passwords for different online services. Hence, when using a digital wallet for crypto storage or exchange, make sure you use strong passwords that can't be guessed by hackers easily. Avoiding putting your personal information like name, DOB, etc. in your wallet password. Also, you can use fingerprint authentication for your crypto wallet app while transferring money to others.
Enable Two-Factor Authentication (2FA)
You should always enable the two-factor authentication functionality if provided by your crypto wallet solution provider. Better you choose crypto wallet solutions that offer this functionality by default. Remember, two-factor authentication is done in different ways by different wallet providers. For example, A Google authenticator app uses a 6 digit code that changes regularly and is unique for every user. Also, whenever possible, use wallet solutions with software or hardware 2FA rather than SMS.
Separate Your Crypto Funds
Spread your total cryptocurrency wealth across multiple wallets - no matter hot or cold to minimize the loss in case of a hack.
Backup your Crypto Wallet Regularly
It is always a good idea to backup your crypto wallet in case you lose the device that is used to access your crypto wallet. Also, make sure the backup is sold in a safe location. Backing up your crypto wallet helps you in the easy restore of your wallet with all-important account details intact.
Now, the Major Question - Are Cryptocurrency Wallets Really Safe for Beginners?
Well, the answer is both a yes and no! If you perform a transaction on the blockchain, it simply can’t be reversed and If the hackers somehow get access to your crypto wallet private keys, it would not be possible for you to do anything in such a case. For this reason, you as a beginner in the crypto sphere might get worried.
But, not be disappointed completely. As blockchain is a new and evolving technology, compared to other techs, researchers and developers are working hard to figure out every possible solution for security loopholes in virtual money transfer on blockchain networks. A lot of firms are coming up with new and advanced options, i.e., private cryptocurrencies, AI-based wallets, etc. to safeguard users’ crypto wallet funds.
Also in most of the big crypto hacks or scams, the online exchanges attacked and reimbursed their victims. So, the chances are always high that you will get your hard-earned money back if you store funds with reputed online wallet solution providers like Binance, Coinbase, etc.
Summing Up …!
I hope you enjoyed reading my blog about the security aspect of crypto wallets. If you have read it completely, you should have developed a really good understanding of how crypto wallets work in the blockchain sphere.
You might have also obtained knowledge about different kinds of wallets and which one is best for you if you are planning to trade or invest in cryptocurrencies for the very first time, depending upon the security protection offered by each.
Also, if you follow the security measures given in this blog properly, hackers will have a hard time sneaking into your crypto wallet accounts. Remember crypto offers great power into the hands of the general masses and unbanked, but with great power comes greater responsibility. So, try to master the art of safeguarding your crypto wallet before it's late.
If you enjoy reading this post, do let me know your thoughts in the comment section below. You can also suggest your viewpoints or ideas for making the crypto wallet security checklist better, given in this article.