Cryptocurrency Wallet

A cryptocurrency wallet, unlike a traditional wallet, is anything that allows you to generate and store alphanumeric strings, known as public-private key pairs, for use with a specific cryptocurrency. Public keys can be shared, private keys must be kept secret. Private keys are used to generate public keys, they are always linked in a pair. One private key can be used to generate a nearly infinite number of linked public keys. Public and private keys are used in conjunction to store, send, and receive cryptocurrency.

Before you can send someone cryptocurrency, a private key stored in your wallet must be able to prove its relationship, via a cryptographic function, to the public address that the currency is currently assigned to. This proves ownership of these specific funds and signals to the network that the transaction is valid. If ownership is proved, the transaction will be recorded on the blockchain, the balance in your digital wallet will decrease, and the balance in the receiver’s wallet will increase accordingly. 

Before we can explore the safekeeping of your private keys, it is important to understand that there are 2 main types of cryptocurrency wallets: hot and cold. Hot wallets need an internet connection to function properly, cold wallets do not. Cold wallets can be further split into two categories: hardware and paper.

  • Software wallets can be desktop, mobile, or browser-based. Desktop and mobile wallets are installed on your device as any other application would be and the private keys are usually generated and stored by the software on your device. In contrast, a browser wallet can be accessed from any device with a web browser and is more convenient to access. However, this convenience comes with the tradeoff that browser wallets are almost always “custodial”, meaning that you must trust a 3rd party to properly safeguard your private keys. 

  • Hardware wallets are physical devices that are capable of generating and storing private keys without external assistance. This means that the private key is not visible to anyone or anything other than the hardware wallet itself, greatly increasing security.

  • Paper wallets, simply a copy of your public and private key pair recorded on a physical object such as a piece of paper or metal, also allow for coins to be stored completely offline such as in a safe or bank vault.

The security of a cryptocurrency wallet depends on the wallet type and service provider. Hot wallets are dependent on the security of the platform provider while on the other hand, cold wallets do not remain connected to an online network and are therefore much harder to compromise remotely. 

What all wallets have in common is that much care should be taken with their storage, maintenance, and security hygiene. Cryptocurrencies can be thought of as bearer instruments; once funds are sent, whether by intention, accident, or theft, the transaction is irreversible. The same is true if you lose a private key and do not have backups, the funds associated with it cannot be recovered. Here are some tips to get you started: 

  1. Keep only small amounts readily accessible in hot wallets. Treat your hot wallet like your traditional cash wallet - only store minimal amounts of your cryptocurrency in it and  safekeep the majority of your funds in a cold wallet.

  2. Create multiple backups of your wallet. Take regular backups of your wallet and store them securely. This will allow you to recover access to your funds should your wallet be lost, stolen, or corrupted. 

  3. Update software and hardware wallets regularly. Software updates are as important for your cryptocurrency wallets as they are for your work and personal digital devices. Regularly keep up with your wallet’s software updates to ensure you have the latest security patches. 

  4. Set a long, unique, complex passphrase for your wallet and enable 2-factor authentication (if applicable). Always set a long, unique, complex password or phrase, preferably randomly generated and store it using a password manager. Enable additional security features including setting two-factor authentication, additional pin requirements per access or withdrawal, and multi-signature features which will require the permission of multiple parties before a transaction can be made.

  5. Do not lose your private keys or forget your wallet password. Losing your private keys or forgetting your password means you will permanently lose your funds if you do not have a backup.

  6. Don’t use any public key more than once, if possible. Malicious actors can use public keys to link transactions and identify you, making it easier to target you. Best practice is to generate and use a new public key for every transaction, making it much harder to link your transactions and reducing your chances of being a victim.

Think long-term. As morbid as it may sound, make sure you are thinking long term when it comes to the location of your wallets and passwords. If these are not passed onto anyone when you are gone, there will be no way to access or recover your digital assets. Create and safekeep a back-up plan in the event that someone you trust needs to recover your funds.

(This guide is part of a series on Personal Security.)