We want to help you make more informed decisions. Some links on this page – clearly marked – may lead you to an affiliate website and may result in us earning a referral commission. For more information, see How We Make Money.
Just as you need a wallet to protect your cash and credit cards, you should also know where you will be keeping your cryptos.
When buying digital currencies on a trading platform or exchange, you may have the option of leaving the “keys” to your coins in your account – this is a form of safekeeping. But you can also move them from the platform to a personal crypto wallet, which can be internet-connected software (a hot wallet) or a completely offline device (cold storage).
Here’s what you need to know about cryptocurrency wallets and how to decide which storage option is right for you:
What is a cryptocurrency wallet?
Like a regular wallet stores physical currency when you are not using it, a cryptocurrency wallet is a place where you can store your digital currency.
“All you need for crypto transactions are two things: your wallet address, which is also called your public key, and then your private key,” says Nicole DeCicco, founder of CryptoConsultz, a consulting practice for individuals and organizations who familiarize yourself with crypto and blockchain technology.
A public key is like your bank account number. You can share it with other people or institutions so they can send money to you or withdraw funds from your account if you authorize it. These people usually think of your public key as a wallet address – a hashed or more compressed version of that public key.
But a private key is like your bank account password or your debit card PIN. “You wouldn’t want to give this to me because it would give me access to your account,” says DeCicco.
As a purely digital currency, crypto is not stored directly in your wallet. Instead, the wallet stores information about your public and private keys, which correspond to your share of ownership in the crypto. These keys allow you to send or receive cryptocurrency while your private key remains encrypted.
Types of crypto wallets
Different crypto storage options can serve different purposes depending on what you intend to do with your crypto. For example, long-term Bitcoin investors planning to keep Bitcoin as a store of value for a period of time may want the security of an offline cold store wallet. Those more involved in active cryptocurrency transactions may want the convenience and speed that an online hot wallet can provide.
These are sometimes called cold wallets or cold storage and store your keys completely offline on a device that is not connected to the internet. Many popular cold wallet devices look similar to a USB drive. Sometimes paper wallets – where you print information about your public and private keys on a piece of paper – are even used as a refrigerator.
Crypto enthusiasts often see cold storage as the gold standard for protecting their digital assets. Since they are offline, hardware wallets are the most difficult type of wallet to hack. But that doesn’t mean that there aren’t still risks.
On the one hand, hardware wallets can easily be lost or misplaced. How many times have you lost a USB drive that only contains documents? That alone is inconvenient. But the loss of a device that holds the keys to your investment – which cannot be recovered once it is lost – can mean a huge financial blow.
Even hacking can still be a problem. If you choose cold storage, DeCicco recommends buying a device direct from the manufacturer and not second-hand. When you buy from a third party, you run the risk of the device being tampered with by a hacker who bought it, compromised it, and repackaged it for sale.
These can also be referred to as hot wallets. When you think of a hardware wallet like the wallet that you might keep in your purse, you might think of a software wallet like your online bank account.
“They’re often tied to an exchange, they’re often easy to use, and they really opened the space to a mainstream market,” DeCicco says. “But there are many risks involved in keeping your money online.”
Hot wallets can take several forms. You can access it through the crypto exchange that you use to buy your coins, download a software program on your computer desktop, or even use a smartphone app. However, because any of these options keep your public and private keys connected to the internet, you may be more at risk of being hacked than using cold storage.
Do you need a wallet?
Technically, you don’t have to keep your coins in the cold store or download a hot wallet program to your desktop. Many cryptocurrency exchanges allow you to store your cryptocurrency in a wallet on the exchange, and some people leave it at that.
But is it okay to keep your crypto in the wallet that an exchange like Coinbase or Kraken offers?
“Crypto purists will fucking say no,” said Tyrone Ross, financial advisor and CEO of Onramp Invest, a crypto investment platform for financial advisors. But there is a learning curve when it comes to crypto, and until you have a solid understanding of public and private keys, hot and cold storage, and other crypto security topics, it’s fine. “Until you’ve learned all of that, it’s okay to leave your coins on Coinbase or Gemini or whatever.”
The goal is not to rely on that option, he says, and eventually move your crypto to your own form of storage, “but these are exchanges that have gone way beyond measure for security and custody.” Your crypto isn’t protected by a regulator like cash in a bank, but in addition to security measures, many reputable exchanges – like Coinbase and Crypto.com – offer insurance coverage for crypto holdings and even use cold storage methods themselves. In the event that your crypto has been stolen by hackers or the exchange fails, this is another extra layer of protection for your investment.
However, there is still a risk of hacking. Just last year, KuCoin (the fifth largest exchange according to CoinMarketcap) experienced a hack worth more than $ 200 million. Even though users’ funds have been recovered, it shows the risk any exchange can bring – just like traditional financial institutions.
A hot wallet offers a similar level of security as your bank account, says Kiana Danial, author of Cryptocurrency Investing for Dummies and creator of @Investdiva on Instagram. Exchanges tend to take their security practices seriously and often have insurance in place to keep them safe in the event of an attack. The tradeoff, however, is how much control you have over your own cryptocurrency.
Danial equates this with your bank’s ability to simply freeze your account. And within a community built on decentralization and the maxim “not your keys, not your coins”, reliance on a centralized entity (the exchange) to control the keys to your crypto can in itself be seen as a security risk. As an example, DeCicco points to outages reported by account holders during the recent dramatic slump in the crypto market.
“Almost every exchange went down right at the point when it is so important that you have the ability to buy or sell cryptocurrencies,” she says. “You don’t always have this option when you keep your money in a purse.”
How to choose the right crypto wallet
When choosing a storage option for your crypto, you should evaluate your risk tolerance and goals, as well as your level of knowledge regarding crypto. If you want to keep your coins long-term and don’t plan to trade, cold storage can make the most sense. But if you are a beginner and are generally cautious about the amount of money you invest, you may prefer the simplicity of being able to buy and store your coins in an exchange.
“We encourage people to go to the source and decide for themselves how and where to get involved after doing their homework,” said Eva Velasquez, President and CEO of Identity Theft Resource Center. Do not rely on options that are advertised or inquired about in your inbox. “Is this a legitimate exchange after doing some thought, are these real companies offering the storage options?”
When it comes to specific options, it is wise to stick to the same rule of thumb as when choosing a coin to invest in or an exchange to trade on – the more established, popular options are usually the ones with less risk.
“I attached a lot of importance to the durability of the platform or the device,” says DeCicco. “You could have vulnerabilities in the security of the software and that’s where hackers can step in. If you have a proven wallet, it’s more reliable that your security team is up to date with their security practices.”
Personal Account Security
As with any type of online account, the active security measures you take can make a huge difference in the security of your crypto.
“If you are unaware of and are not following basic cyber hygiene best practices,” says Velasquez, referring to practices like updating devices, managing network security, and using multiple passwords, “then you should be in Consider practicing this first. You decide to dive into something new, like getting involved in crypto. “
Here are just a few things to keep in mind:
- If your wallet is running on software, update frequently and don’t use old versions of the software.
- Go for two-factor authentication and make sure that whatever exchange or hot wallet program you use offers it as an option.
- Don’t share your private key with anyone in the same way you wouldn’t share your social security number or debit card PIN.
- Keep strong passwords that you update regularly, and don’t use the same password for multiple accounts.
“We hear a lot about hacker attacks,” says DeCicco. But even if hacking is a real risk, “I work every day with just as many customers who were their own worst enemy.”