Because of their popularity and rising prices, cryptocurrencies such as Bitcoin and Cardano are now frequently targeted by hackers looking to profit from these valuable tokens. Once these hackers have acquired their target, it can be extremely hard to catch them, as they are able to digitally erase their footprints from the internet. Not only that, but due to the unregulated and decentralized nature of cryptocurrency, it’s almost impossible to legally bring them to justice.
That’s why it’s now more important than ever for beginners to learn how to keep their digital assets safe when making any investments in crypto. It’s incredibly important to understand how wallets work and the security they provide against malicious actors. It’s also important to understand the safety measures you can take to ensure your crypto is secure, especially if you want to invest large amounts.
A common mistake most crypto newbies make is leaving their cryptocurrency on a particular exchange without prior research. Be sure to understand how the exchange stores your crypto, do you actually own the asset or does the exchange? These platforms allow you to buy and sell crypto, but they might not always be the most safe place to store your tokens.
That’s because the majority of exchanges are centralized (CeFi) exchanges (Coinbase, Kraken, Binance, etc). This means that a single entity controls all transactions and processes going through it. When you purchase cryptocurrency on Coinbase, the tokens are stored within their own wallet and the system then delegates them to you. So if something goes wrong with the exchange, your cryptocurrencies may not be protected.
Before deciding which platform to use, carefully review the security features of each platform to understand how your data will be protected. Only choose trustworthy wallet providers, exchanges, brokerages, and mobile apps that use multi-factor authentication, SSL/TLS encryption, and air-gapped devices that are kept offline.
If you aren’t actively trying to trade crypto, then it may be safest to store your tokens in a wallet, whether that be hot or cold. Wallets can hold different types of crypto based on their token type. For example, ERC-20 is the standard token type of the Ethereum network. These tokens would need to be stored in a wallet that complies with ERC-20 standards.
But what is a hot wallet vs a cold wallet? Simply put, a hot wallet is a piece of software that remains connected to the blockchain network. It has a unique private key that identifies it on the blockchain, and can be used to receive cryptocurrency.
Cold wallets are actual pieces of hardware that can store your private key offline, meaning it can be disconnected from the blockchain network while still retaining your cryptocurrency. For maximum security, users can use a hybrid wallet strategy.
The hybrid wallet strategy involves using a combination of both hot and cold wallets. Your crypto is stored on the wallet host’s server, but your private key is stored on your own device. Whenever you make a transaction, your private key is encrypted on the way to the exchange’s server, so they never see it.