Cryptocurrency Wallets and it’s Risks
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 a disaster waiting to happen. Listed below are types of bitcoin and cryptocurrency wallets and the risks and advantages of using them.
Cryptocurrency Exchanges (Risk level: high)
Storing cryptocurrencies on exchanges are mostly done by the people that are quite new in the cryptocurrency space. I mean, why not? Exchanges like Bittrex and Binance can hold up to more than a hundred different coins right? Great! all my coins on a single account! No. Just, no.
Some people usually think of exchanges as being sort of “super secure” or something along those lines. Well, people thought the same way with the famous Mt.Gox exchange at around 2014. People left their funds on Mt.Gox thinking it was sort of “unhackable“. Guess what happened? Mt.Gox has been allegedly hacked for around ₿100,000; then filed for bankruptcy months later. Wikipedia link for more info
Don’t let history repeat itself. Only use exchanges for what it’s intended for: only as an exchange platform for cryptocurrencies, and NOT as a wallet.
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.
So this means that these wallets are good choices, right? Not necessarily.
Web wallets are wallets whereas you can access your funds by logging in to a website/app using a username and a password; and usually with most wallets, they don’t give you access to your private key(s); instead, they are stored online and is only accessible by them.
Think of a private key or recovery seed as sort of like your wallet’s password.
Sure, some of these wallets provide very good service by allowing us to easily exchange our crypto for fiat and vice versa, by allowing us to have easy access to our funds, or by giving us fee-less transfers from Coinbase to 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.
“If you don’t control your private keys, you don’t own your bitcoins” -anonymous
Software Wallets (Risk level: Low-moderate)
Software wallets are wallets whereas you download a program/app to your computer or mobile device.
So, pretty much the same with Coinbase right? Nope. The difference with web wallets like Coinbase compared to software wallets like Electrum or Exodus is that you don’t need user logins with software wallets; instead, you use your private key(s) to access your funds; which is great security-wise, since only YOU have access to your private key(s) as opposed to web wallets whereas the private keys are stored online, on the wallet company’s database.
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.
Hardware Wallets (Risk level: Very Low)
Hardware wallets are wallets whereas your private key(s) are only safely stored on the hardware device itself. 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.
Hardware wallets might be a bit expensive for most people(Ledger Nano S is around $95 and Trezor is around $105), but if you’re holding at least worth $1000+ in funds, getting a hardware wallet should be one of your priorities. Better to spend a hundred dollars on a hardware wallet than to risk your funds from getting hacked.
Paper Wallets (Risk level: ?)
Paper wallets are wallets that, you guessed it: private key(s) that are printed on pieces 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, probably even more unsecure than a web wallet. If you’re not sure how to make one securely, don’t risk it; go the safe route and purchase a hardware wallet instead.
Also take note that paper 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.