After another jump in the price of major cryptocurrencies in late 2020, crypto enthusiasts began mining, selling and buying currencies with renewed vigor – which means that the subject of custody of cryptocurrencies is more topical today than ever. Unlike the previous bullish waves, this time around, many users are also concerned with protecting their assets.
The blockchain industry is developing and retailers have become noticeably smarter, but fraudsters and thieves have also become much more agile. This is also indicated by the appearance of news related to exploits and carpet pulling, not just in relation to ordinary users but also in relation to large exchanges, decentralized financial projects and even unverifiable tokens.
Scammers use a variety of tools, from hacking accounts to creating malware. Well-known projects do not avoid this fate either. For example, Trezor recently discovered fake apps on Google Play that affected some users. At the end of December 2020, more than 270,000 customers of the popular Ledger wallet were exposed to threats after their personal information was disclosed by a hacker.
All of this suggests that crypto enthusiasts should be extremely careful when choosing where to store their assets.
Buying crypto is becoming mainstream
In 2021, Bitcoin (BTC) has firmly established itself as a generally recognized investment vehicle and store of value and is now being compared to gold. This was especially noticeable when institutional investors began investing hundreds of millions of dollars – sometimes billions – in BTC.
From Jack Dorseys Square, who recently spent an additional $ 170 million on BTC, to M31 Capital, which is filing documents with the Securities and Exchange Commission to launch a new Bitcoin hedge fund, crypto is becoming the Mainstream. Additionally, Grayscale Investment’s Bitcoin trust now manages over $ 37 billion in BTC, suggesting institutional investors feel safe with the instrument. All of these examples serve to cement crypto as a viable investment option for private investors as well.
In addition to simply buying cryptocurrencies, new ways to make money have appeared in the market, such as decentralized financial protocols that offer various blockchain-based financial services. Indeed, this is a very good way to get a steady income in cryptocurrency with pretty high annual interest rates.
The rise of decentralized exchanges has made the process of owning and exchanging cryptocurrencies even easier. This method of trading cryptocurrencies has been rapidly gaining popularity recently.
With such exchanges as Uniswap, users can conduct transactions directly between wallets. This method implies that users need to know how to properly store and handle crypto through third parties.
Alternatively, a central exchange is also available to users. However, there are certain risks associated with storing funds. For centralized exchanges, this means that crypto in the platform’s accounts automatically falls under the custody of the exchange, which means that users do not have full control over their assets. Hence, most crypto commentators recommend storing crypto in external wallets.
Examples of crypto wallets in 2021
Every user should remember some basic security rules that are not related to cryptocurrencies themselves or the devices used. The most important thing is that users need to remember their password. It seems obvious, but users regularly lose large amounts of money simply because they forget passwords.
Blockchains don’t have a password reset feature and there’s no support service you can call. Also, it is a mistake to forget the 12-word starting phrase of a wallet or to write it on media that is easily lost. The most effective recipe for protecting crypto assets is to be responsible for storing passwords and creating a passphrase for the key.
With online wallets, this is a little easier and the effects of losing a password can be avoided because the keys are held by a trusted third party. The owner of the wallet does not control the keys, he simply logs in with a username and password. If your password is lost, you can contact support, confirm your identity and reset the password. However, from a decentralization perspective, this is not the perfect option as the user is delegating control of their keys to third parties.
It is up to the user to decide what is more important to them and whether they actually trust the company that hosts the gateway to their crypto holdings. In addition, each user should be responsible for their own capital, as no crypto wallet or blockchain is responsible for forgetfulness or inattentiveness.
There are several known types of wallets:
Hardware wallets are a more sophisticated way of having a wallet that stores currencies on off-line offline devices. Some of the most popular solutions are Trezor, Ledger Nano X, and KeepKey. These wallets usually come in the form of small flash drives and can support thousands of cryptocurrencies.
For example, Trezor offers two types of wallets, Trezor One and Trezor Model T, which can be purchased for $ 60 and $ 193, respectively. The Trezor One wallet has two control buttons and the newly developed Trezor Model T has a touchscreen.
The device is connected to the user’s PC via a cable. Security is guaranteed by the device that stores the secret key and deregisters transactions offline in the device itself. If there are viruses on the user’s PC, it does not mean they have access to the wallet. Of course, in order to avoid losing money and being scammed, users should only buy such wallets through the official websites and make sure that the device is packaged as specified by the manufacturer.
Connecting a wallet is very simple: users need to go to the official website, download an app and set up a new wallet. The main requirement is to write down and save a mnemonic phrase of 24 words, and then create and confirm a password.
Local wallets are the most popular type because they can be downloaded or installed on devices. Users can only enter such wallets from the device on which they are installed. When using a local wallet, the owner has full control over their assets as private keys are stored locally on the device without third parties having access to this information.
These days, Jaxx, Exodus, and Edge are some of the most popular local wallets out there. These are examples of free multi-currency wallets that support a large list of cryptocurrencies. In addition to a desktop version, these wallets usually also have a mobile version. Most of these platforms have been integrated with ShapeShift and Changelly, where currency conversion is done right in the app without switching to a cryptocurrency exchange.
Private keys are only stored on the owner’s device. Protection is done using a PIN code with the option to copy private keys for offline storage.
Web wallets work with cloud storage and users can access them from any device. Such wallets are just apps on mobile phones or can be accessed through websites, which is very convenient. For example, Matbea, Coinbase and BitGo are all web wallets and exchanges in one service. Matbea only supports seven major cryptocurrencies, which is not a wide range by today’s standards. However, when it comes to security, this wallet has a head start.
Most of these services use two-factor authentication: a code sent via SMS or email and a separate password. Even if a virus has settled on the user’s PC, there is no way they can read the code from their mobile device to gain access to the wallet. And if a virus settles on a smartphone, it cannot read the password or email code. Files are backed up regularly so users’ currency is restored instantly even in the event of an accident or hard drive failure.
After all, paper wallets are quite reliable, but due to the fact that their public and private keys are printed on paper, they are not used very often. But such wallets seem like the most interesting way to use crypto. In fact, a paper crypto wallet is just a sheet of paper with a QR code printed on it that contains an encrypted address for storing cryptocurrency funds. QR codes must first be scanned in order to conduct cryptocurrency transactions.
This method of storing cryptocurrencies is quite safe as the cryptocurrency is completely protected from attacks by fraudsters. Paper wallets, along with hardware wallets, are often referred to as “cold stores” because they are completely isolated from the internet and cannot be hacked from the outside.
In order to create a paper wallet from cryptocurrency, users need special software like Bitaddress.org, which has open source code in it. The service creates a cold store folder with randomly generated numbers directly in the browser. Secret keys remain with the users and are not stored on the Bitaddress.org servers.
WalletGenerator also works like Bitaddress.org, with users having to move the mouse to increase the randomness of the key generation. The developers also recommend turning off the internet and running the generator from a local HTML file after downloading the archive from GitHub.
There are wallets that combine several of the methods mentioned above. For example, Casa, which was developed in mid-2020, combines the functions of a local and a mobile wallet, with developers setting security as the main goal.
When creating a wallet, the user does not need to enter and save a startup phrase or personal information, just email and names. In addition, the wallet does not record the location, the data transferred, and does not contain any third-party analytics tools. The user will be asked to create a key that will be stored on the device and the backups will be split between Casa’s own storage and Google or Apple cloud storage. Only the user has access to the key, which requires two-factor authentication.
Another wallet that offers a combo experience is Savl, a mobile wallet for Android and iOS that combines a peer-to-peer platform, crypto wallet, messenger and cryptocurrency payment service. The wallet has been in operation since 2020, and as in the case of Casa, the developers claim special attention has been paid to security and privacy.
When a user is registered, the application generates a unique 12-word string that is stored on the user’s device. Nobody but the user has access to it, not even the developers. Access to the app is protected by a six-digit PIN code that is defined by the user.
Can a wallet be completely secure?
All crypto wallets are secure in their own way if you choose them carefully and understand why they are needed. Which wallet to choose depends on the individual. But the main thing here is security and the ability to store private keys or startup phrases.
If a user needs to store a large amount of crypto, it is better to buy a hardware wallet. For those who are constantly trading on exchanges, users can store money in wallets created on those exchanges for quick transactions and no transfer fee. However, if the exchange is hacked and there is no insurance fund, crypto can be lost. Web wallets are more suitable for everyday use. The popularity of this type of wallet is based on the ability to quickly and easily sell various cryptocurrencies and make transfers directly to an exchange.
Overall, cryptocurrencies were created on the premise of decentralization, which means that each user controls their own money instead of a centralized entity. Regardless of which method the user chooses to store crypto, they have to take responsibility for their money.
Cointelegraph does not endorse any of the products mentioned in the article. Each user should do their own research to choose the product that will work best for them.