Cryptocurrencies in general contain a highly rich impregnable encrypted algorithm code to execute a financial transaction. During the transaction, unlike manual bookkeeping entries, it uses public ledgers called the blockchain for registering the transaction. This is carried out by a chain of parties by recognizing and approving the transaction. These transaction codes will then spread across a string of networks and the transaction gets approved based on consensus.
Now that cryptocurrencies have gained the attention of the general public, it is important to guard your money safely. While security has always been a major concern with holding cryptocurrency, the increased visibility of their value has attracted the attention of more and more hackers. Learning how to properly store them in bitcoin wallets without running into risks is going to be a bigger subject than most people realize as we advance into this space.
What’s a Cryptocurrency Wallet?
When a cryptocurrency wallet is mentioned it is usually a digital wallet or hardware wallet that is using to store cryptocurrency, sending and receiving various cryptocurrencies. The wallet does not store your money in a real wallet that you’re used to seeing physical money go into. Tangible wallets do exist called a hardware wallet but that is only one of the few ways you can store your cryptocurrencies.
The public key is your address that anyone can use but just to send money. It cannot be used to withdraw. Private keys give you access to your wealth and it can only be used by you. Only you should know the hash address to your private key. You should not lose this critical key or give it out to anyone.
One of the more infamous stories, that of Mt. Gox, may solidify it:
“FROM A DISTANCE, the world’s largest bitcoin exchange looked like a towering example of renegade entrepreneurism. But on the inside, according to some who were there, Mt. Gox was a messy combination of poor management, neglect, and raw inexperience.
Its collapse into bankruptcy last week – and the disappearance of $460 million, apparently stolen by hackers, and another $27.4 million missing from its bank accounts – came as little surprise to people who had knowledge of the Tokyo-based company’s inner workings. The company, these insiders say, was largely a reflection of its CEO and majority stake holder, Mark Karpeles, a man who was more of a computer coder than a chief executive and yet was sometimes distracted even from his technical duties when they were most needed. “Mark liked the idea of being CEO, but the day-to-day reality bored him,” says one Mt. Gox insider, who spoke on condition of anonymity.
Last week, after a leaked corporate document said that hackers had raided the Mt. Gox exchange, Karpeles confirmed that a huge portion of the money controlled by the company was gone. “We had weaknesses in our system, and our bitcoins vanished. We’ve caused trouble and inconvenience to many people, and I feel deeply sorry for what has happened,” Karpeles said, speaking at a Tokyo press conference called to announce the company’s bankruptcy. This would be the second time the exchange was hacked. In June 2011, attackers lifted the equivalent of $8.75 million.” (Wired, 2014)
Different Types of Wallets for Cryptocurrencies
To combat this, the owners of this new gold 2.0 must take the appropriate steps to ensure that nobody gets their hands on your future. To understand the best way to save our coins, it is important to first have an understanding of the different methods available to us.
Best Options for Storing Cryptocurrencies
- Hot storage
- Cold storage/Hardware wallets
Hot Wallet Storage:
Funds are easy and quick to access and you can use it for your daily transaction. It supports different devices and can access from anywhere, if there is internet access making it easy to use.
Online, mobile, desktop, wallets are simple to use and convenient because it just has to be downloaded. But it has a high possibility to get hacked by someone having access to your device. Cryptocurrencies can be damaged or lost if desktop or your mobile phone become damaged.
Exchange: A cryptocurrency exchange is an online platform or digital marketplace where traders can buy and sell cryptocurrencies using different forms of fiat currency or other altcoins. A cryptocurrency exchange typically has a few forms of supported crypto, so you may need to use more than one depending on the different types of coins you would like to dabble in. This can be looked at similar to pocket cash.
Cold Wallet Storage:
Online Wallet: A wallet is a software program where altcoins are stored. For this definition, online is intended to mean a device that is connected to the internet. To be technical, coins are not stored anywhere; there is a private key (secret number) for every wallet address that is saved in the specific wallet of the person who owns the balance. Online wallets facilitate sending and receiving altcoins and gives ownership of the coin balance to the user. The wallet comes in many forms; desktop, mobile, and web-based are the three main types of wallets. Hardware wallets are also, technically, online wallets, but with a much higher amount of security. This can be thought of similar to a Checking account. One of the more popular web-based wallets, with great security features, can be found at Blockchain.info
Hardware Wallet: Hardware wallets are a special type of physical bitcoin wallets which will store the user’s private keys in a secure hardware device. These devices have major advantages over standard software wallets, such as an online wallet or an exchange. Private keys are often stored in a protected area of a micro controller of the hardware wallet, thus cannot be transferred out of the device in plaintext. These devices are typically unhackable and the only risk of losing coin is in the event of losing the hardware itself or your seed words. Seed codes are a string of 12 to 24 words that only you have which is essentially your password.
Storing your currencies in a physical device, which is entirely offline not in use is the ultimate safe storage. It is ideal for keeping a significant amount for a long time. Since the device has no internet connection, it will be the safest place to keep your cryptocurrencies as the wallet is unreachable for hackers and people with foul intentions.
A bitcoin cold storage is not ideal for those wanting to do daily or quick transactions. Further, there are possibilities to lose the currency due to human error. Therefore you need to have good knowledge in saving the currency in your physical hardware wallet, by protecting it from external/internal damages and theft.
For augmenting the safe storage system, many companies are offering added features to offline wallet systems to protect the cryptocurrencies in the cold wallet. Though such setup process is a bit cumbersome, it is safe as compared to other storage options. One of the standard offline methods is the paper wallet.
It is an offline cold storage method for saving cryptocurrencies which include printing out your public and private keys in QR code along with your hash address on a piece of paper and keeping it in a secure place.
Since it’s on a piece of paper, it can be pretty easy to get it destroyed or even get it lost are a couple of the significant drawbacks for it. For printing the QR code, you also need to have a good quality printer. Paper wallet storing requires in-depth knowledge of the setup and mastering the techniques may find challenging for a novice.
Paper wallet are cheap and free. They’re easy to use if you want to gift the cryptocurrency to somebody. Overcoming the initial set-up problem and mastering the tricks is yet another problem with the paper wallet.
A paper wallet is an offline means for storing altcoins; also referred to as cold storage. It is the best free btc wallet if you’re on a budget. The public key and the private key will be printed either on paper, plastic, or metal, saved on a USB drive, or physically written down. Depending on how the paper wallet is set up, it can be seen as the most defendable and secure means of guarding your coin. As soon as a paper wallet ‘touches’ the Internet, it is no longer secure. This can be seen in a similar fashion to a bar of gold, 401K, or bonds. Here are a few tutorials on how to create paper wallets:
Multi-signature wallets requires multiple keys for the operation. It is more secure than almost any other way and can be used by multiple people.
In multi-signature wallets, the service provider will issue three private keys. The service provider will hold one key, the second key will be with the user and third will remain as a backup key that user can keep or give up. You need to use any 2 or 3 keys to complete one transaction.
Which is the Best Bitcoin Wallet?
As long as you have a wallet you know how to use and comfortable with then it is a good wallet. However, in our opinion, the best wallets are hardware wallets like a Trezor or Ledger. They are known to be the safest because it cannot be used if it’s not plugged into your computer making it the most secure bitcoin wallet. You then have to know the pin code to log in. This can deter many hackers from using this method and go after other easy ways. Exchanges are usually the one getting hacked the most. So as long as you use a cold storage, you don’t need to worry about what bitcoin wallet to use.
Why is storage necessary?
Storing your cryptocurrency tokens has become extremely important as major cryptocurrencies face hacking threats and sketchy activities from exchanges. It has become necessary for the holders to have a secure place for storing their electronic currencies.
Setting up a hot storage is easy when comparing to a bitcoin cold storage, as the cold wallet require some knowledge on its set up. But once you master the cold storage set-up, its benefits are enormous as compared to the risk of the online hot store. Storing your hard-earned cryptocurrencies offline reduces the chance of losing them. No type of storage can give you 100% security for your electronic currency. Hence, it is better to keep the currency in different wallets proportionately. If you want to use the cryptocurrency on a regular basis, keep the currency in the hot storage and keep the remaining in the cold storage.
Always try to create secret passwords that are easy to remember, so that you can quickly gain access to your account, in the meantime make the password discrete to the maximum level. Keeping maximum protection for your hard earned cryptocurrency is your responsibility, so keep it safe.
Now that we have become familiar with the different ways in which to store coins, it is time to discuss which will be best suited for your needs. For most people, any of the coins available will be traded, exchanged, or spent. For this reason, it is important to have them available. As described above, having spending money (an exchange account) is a good idea for smaller everyday purchases and day trading. Using an online wallet or a hardware wallet can be beneficial for higher trading, sending money to friends and family, and paying bigger bills. Hardware wallets are the most versatile and can be easily used to store larger funds as well as funding your other accounts. The paper wallet should always have multiple redundancies and be looked at as a nest egg. Deposit money to it when you have it, otherwise never use it. At the end of the day, diversification will be the smartest decision for most, but make the decision that is best for you!