Purchasing cryptocurrency is a great way to invest in the future of commerce. However, because holding cryptocurrency is inherently risky, knowing how to manage it is critical to protecting your new assets.
It’s a double-edged sword. The same characteristics that make cryptocurrency versatile and exciting also make it just slightly perilous. Cryptocurrency transactions rely upon connectivity and information sharing. For those reasons, cryptocurrency is vulnerable to cyber attacks and fraud. Scammers and thieves can steal your cryptocurrency through both targeted and mass attacks if it’s not properly secured.
Consider how you’d manage traditional cash. If you were traveling through an area with lots of pickpockets, you’d be sure to keep your money in a trustworthy, secure wallet. Similarly, the ideal holding device for storage of your cryptocurrency is also called a “wallet.”
Hot Wallets versus Cold Wallets
As a general rule, do not leave your cryptocurrency in an exchange. Exchanges are notoriously susceptible to hacking and heists, which is evidenced by multiple incidents with massive losses.
First, the basics. Each cryptocurrency owner has a unique user ID comprised of alphanumeric characters. The user ID is necessary to access any user’s address. When two parties engage in a cryptocurrency transaction, each must disclose their address to the other, and the blockchain confirms the transaction’s validity. Once the transaction is complete, nobody is able to access the currency without having the private key. Thus, it is imperative that private keys be guarded and handled with extreme care and secrecy.
Wallets for cryptocurrency storage are either “hot” or “cold.” The primary difference between the two is, while a hot wallet stays connected to the Internet, a cold wallet does not. This distinction relates directly to the safety and security of the devices and should ultimately be considered when choosing how to store your cryptocurrency.
Lots of people gravitate toward hot wallets for convenience. Hot wallets come in a variety of types—such as online, software, and mobile. Because it stays connected to the Internet, those that anticipate frequent transactions assume that this kind of wallet will allow for faster and easier access to their money, as well as spending without hassle.
However, that convenience is accompanied by significant drawbacks. Hot wallets make cryptocurrency easy to access and to use, for you as well for scammers and thieves. Hot wallets are extremely vulnerable to attack and, as such, they are too precarious of an option for anyone looking to maximize the security of their cryptocurrency.
It’s important to keep in mind that, unlike credit cards, checks and traditional bank instruments, there’s no way to recover lost or stolen cryptocurrency. Once it’s gone, it’s gone.
The Case for Cold Wallets
The simple fact that cold wallets are not connected to the internet means a huge security boost, as compared to hot wallets. Scammers will be actively looking for an opportunity to seize your hard-earned cryptocurrency. Storing your money in a cold wallet is effectively the cryptocurrency equivalent of having a deadbolt on a door. The would-be criminals can’t access your cryptocurrency because it’s offline.
Here’s how a cold wallet works. At the moment of cryptocurrency transaction, the cold wallet reveals the private keys in an offline environment. Even if the transaction is initiated online, it is moved to an offline wallet—which can be on paper, an unconnected computer, or USB—for the digital signature phase. The transaction is recorded online afterward, but at no point are the private keys revealed or recorded online.
The benefits of using a cold wallet are potentially infinite, but here are the top 3:
- Cold Wallets Keep Your Private Key Secret
- Since your private key isn’t exposed online during transactions, it’s not vulnerable to being seen or stolen by nefarious entities.
- Cold Wallets Aren’t in Danger of Being Targeted by Hackers or Damaged by Computer Viruses
- Since cold wallets operate in an offline environment, they’re immune to network-related vulnerabilities such as computer viruses, malware, spyware, and hackers.
- Cold Wallets Ensure the Best-Available Security and Encryption
- Cold wallets are protected by security features that only you can activate. This can include anything from a password to an encrypted pin to a biometric identifier. Wallets are designed to self-destruct and erase your private keys if someone makes too many unsuccessful PIN/password attempts.
If Want to Keep Your Crypto Safe, Cold Wallets Are Your Best Bet
When it comes to cryptocurrency storage and transactions, nothing compares to the security of a cold wallet. Due to the lack of recourse if you lose your private key or it gets exposed by the wrong entity — it’s of critical importance to choose the safest cryptocurrency storage wallet available.
This article was published by ITBiometrics, Inc. a leading biometric hardware and software technology company that provides user-authentication services to consumers, businesses, and governments. The ITBiometrics Platform enables developers to build high-security software solutions using the trusted ITBiometrics fingerprint reader and hardware SDK. To learn more, visit https://www.ITBiometrics.com