An Intro to Crypto Wallets
Content:
General Information-
What is a Crypto Wallet?
Types of Crypto Wallets
Wallet Risks
Best Practices
Closing Thoughts
General Information-
What is a Crypto Wallet?
Many people will hear the term ‘wallet’ as a newcomer to the crypto space and think of the typical physical wallet that most people carry before crypto was discovered. However, a crypto wallet may be more complex than most understand. A crypto wallet serves a similar function to a tangible one…Only it’s a lot more secure and digital. Because the crypto wallet is stored on the blockchain, it may be accessed only through a complex process. Crypto wallets are usually secured by a "seed phrase" that keeps your crypto safe and accessible so that you may send, receive, and buy other cryptocurrencies. In the next section we will discuss the types of wallets that crypto has to offer.
2. Types of Crypto Wallets
Like in the real world there are many ways to store money, in crypto, there are many ways as well. Crypto wallets vary in different types such as hardware wallets, hot wallets, and paper wallets. Each has its pros and cons but we will mainly discuss the differences here with examples. (1) Paper wallets are wallets that are on physical paper that most use to store away in a safe place. (2) Hardware wallets are like USB drives that need to be connected when you wish to access your crypto. (Examples: Ledger, Trezor) (3) Hot wallets are like apps on your phone that you use to buy/sell/receive crypto. (Examples: Trust Wallet, Metamask, Xumm) There are even such things as crypto custodians like Fireblocks that hold your crypto for you. Others even like to use exchanges like Binance.US to diversify their asset holdings.
3. Wallet Risks
As your own crypto custodian, you gain more control, but you must also assume the responsibility of securing your assets. This requires that you protect them against theft, fire, loss, and even duress. A proper wallet will typically make your funds less accessible. This can be a good thing or a bad thing depending on the individual. How “crackable” your password is can be determined by its complexity, and how hackable you are as a person is determined by your OpSec. Assuming you are a proper custodian, the question becomes whether your wallet can be hacked.
A paper wallet can be hacked simply if it is found by a dishonest person, and when lost, it is lost forever. For password-encrypted wallets, the onus is on the user to safely hold their keys. Strong OpSec is to never create a private key or mnemonic seed using an online wallet generator, as there are many known to be nefarious. Hot storage wallets are generally only as secure as the device on which they are stored. This also depends on the Operating System and the OpSec of the user. Cold storage hardware wallets are generally the least risky if lost or stolen, but they are just as prone to human error, while also vulnerable to loss, seizure, and fire. Keep your hardware wallet or mnemonic seeds separate in multiple locations because good crypto custodians should always have a backup plan – regardless of wallet type.
4. Best Practices
In this section, we will go over best practices when using crypto wallets and things you should avoid. Best practices when using a crypto wallet: (1) Always double-check where you are downloading/creating your wallets from whether it's a cold wallet generator, web browser extension, or downloading a hot wallet. (2) Use 2-step-verification and verify the address before sending any crypto to another address. (3) Never leave all of your cryptos in one wallet as that can create a single point of failure in the event of an error. (4) Never share your “seed phrase” or passwords with anyone as the seed phrase gives access to the wallet. While these practices all seem simple, it's worth mentioning as crypto is still fairly new.
Closing Thoughts
Crypto is a new sector and we still have a lot of people who need to be on-boarded. To this day, I receive questions on where to start and that still shocks me as I’ve spent five years in this space. We are still extremely early in this new realm as the USA still hasn’t provided clear regulations as to what security is…It's quite incredible and that’s why as a community we must continue to contribute and inform new users on what they should/shouldn’t do when it comes to crypto wallets or anything revolving around crypto. Crypto wallets may be complicated at first but like anything else you learn to adapt.
Written in collaboration with: https://twitter.com/TheShiftPoint & https://linkedin.com/in/austinsanderson