How To Keep Your Cryptocurrency Safe - Wallets, Keys, Security & Exchanges Explained!
One of the best features of cryptocurrency is you are in charge of your own money. There's no middle man (like a bank) holding your money hostage. You can do what you want with it and you get to keep your privacy.
If your money is in a bank, while it is technically yours - the bank could take it away at any time or freeze your transactions and there's not much you can do about it.
What if the bank mismanages everyone's money and no body is willing to bail them out this time?
This isn't me saying banks are evil and you should never use them or trust them, I'm just saying you don't have full control. Banks come with a number of benefits - protection and convenience mainly.
With cryptocurrency though you have total control. This is amazing and terrible at the same time.
Nobody can take your crypto from you, providing you take the necessary security steps ofcourse.
But while you have total control, any mistakes you make are on you. If you leak your private key to the world or lose it, the only person left to blame is you. There's no bank to bail you out. Your money is gone.
So when taking full control of your money, that also means you take full responsibility for your money.
Are you ready to take full responsibility for your money?
Let's start from the beginning - you've just invested £200 and it is sitting on the cryptocurrency exchange you selected looking all pretty and cute like.
(Still haven't decided which cryptocurrency exchange to use? Check out the exchanges I recommend for beginners!)
Summary of the article above:
Should You Keep Your Money On A Cryptocurrency Exchange?
Absolutely not. A big fat NO!
You run into the same problem I mentioned above - you don't have full control of your money. The people that run the exchange can take your money or freeze your account and there's nothing you can do about it. What if the exchange gets hacked? Boom, you're skint.
Cryptocurrency exchanges have only existed for ten years - most of them less than five! At least banks have been around for a while.
So if you're not supposed to leave your money on the exchange, where are you supposed to put it?
Cryptocurrency Wallets Explained
(Ladies you'll have to pretend they're purses)
You'll find that people use different words and phrases in the crypto space.
- When a wallet is connected to the internet, it's called a hot wallet.
- When a wallet is NOT connected to the internet, it's called a cold wallet.
Think of cold wallets as a protected vault - these are used for large amounts of money that you just want to store. No daily use to pay the bills or have fun. A dragon hoarding its treasure in a cave.
Think of hot wallets as your every day purse / wallet - these are used for smaller amounts of money that you want to use. Buying food and paying bills. Trading and moving money. Treating your friends and family.
Private Keys & Public Keys Explained
An address is a randomly generated sequence of numbers and letters that can only be used one time (single-use token).
Similar to an email address, you can send cryptocurrency to someone by sending it to one of their addresses.
Rather than sticking to one address however, a unique address should be used for each transaction.
Exchanges and wallets generate brand new addresses each time you send money or receive money.
Your private key is a randomly generated sequence of numbers and letters that relates mathematically to the address.
To reverse engineer your private key from the address would take supercomputers trillions of years, thanks to strong cryptography (crypto - get where the name comes from?)
The public key is not the same thing as the address, though they are mathematically related. This is where the confusion happens!
A public key is a randomly generated sequence of numbers and letters. An address is a hashed version of your public key.
Hashing is when you take a sequence of numbers and letters and shorten it to a fixed-length value or a key that represents the original sequence of numbers and letters.
It took me ages to get my head around this stuff, give yourself time to process it and revisit it a few times to check your understanding.
Types Of Cryptocurrency Wallets
The crypto wallet you should use is highly dependant on what your needs are. You're more than likely going to be using a few different wallets, so let's learn about them.
We've got three categories:
- Software - Desktop / Mobile / Online - Nothing Physical
- Hardware - Equipment - USBs - Plugged Into Your Computer / Laptop / Phone
- Paper - Printed QR Code
These wallets run on the cloud and you can access them from any device anywhere in the world. They're super convenient, but they're unsafe. You're vulnerable to hacks and your money and private keys are not in your full control.
Similar to an online wallet, only you download an app on your phone. Same problem as above, you don't have full control and you're vulnerable to hacks. They're convenient and generally even easier to use.
They're much more secure than online and mobile wallets as you can only access the wallet from a single computer. You just download the wallet onto your computer. You're still vulnerable to hacks and if a nasty virus finds its way onto your computer you're knackered.
The safest option to manage your cryptocurrency is a hardware wallet.
These wallets store your private keys on a device, most of the time a USB. They're much safer than the three above, but that comes at a price. You'll be able to find free and trusted software wallets - hardware not so much. Maybe if you go to meetups and conventions you'll find some promotional freebies.
When using a hardware wallet your money is always offline - even when making transactions.
You'll need to create a 4 to 8 digit PIN. If you lose the wallet and someone tries to brute force their way in, it resets itself and erases all the data.
But doesn't that mean I lose all my money either way?
When you first setup your wallet you'll be presented with a 12 or 24 word sequence that you need to write down, this is the wallet seed. You need to secure this and make sure no one ever sees it.
Don't get mixed up - your money isn't in the hardware wallet. If you lose it, it's all good. The wallet seed is your wallet! Keep the 12-24 word sequence safe and you keep your money safe.
The hardware wallet gives you the ability to unlock the addresses where your coins are stored on the blockchain.
Let me just say that it is incredibly easy to setup your hardware wallet - don't let this information overload get to your head. Whichever wallet you choose will walk you through it step by step.
The top two hardware wallets are Trezor & Ledger - they both have their benefits. I use both because I think it's safer to spread your money out and I wanted to compare them.
- More User Friendly
- Feels Sturdier
If you're only interested in the top five coins - this bad boy is your best choice.
- More Features
- Better Support
- Ordinary Looking USB
If you want to hold a lot of different alt coins - this is the perfect wallet for you.
Hardware wallets are your best choice when interacting with the crypto world. You get the security of the cold wallets and the convenience of the hot wallets. Best of both worlds really - only problem is it costs money compared to all the free options.
If you're handling large amounts of money, do yourself a solid. Is the risk worth it? Sleep easy.
Using a a paper wallet is a safe way to store your cryptocurrency and you can set one up for free. You need to guard the piece of paper with your life and make sure no body ever sees it though.
The keys are printed out as a QR code which you can scan in the future whenever you want to make a transaction.
A paper wallet is your best choice if all you want to do is hold onto your crypto. If you want to move money around and trade coins, get yourself a hardware wallet.
Please don't reuse addresses! Do your research.
Don't be one of the horror stories, take the necessary steps to keep your cryptocurrency safe.
There's a guy routing around a landfill right now because he threw his hard drive away with a couple hundred bitcoins on it.
Test your recovery process to make sure it works.
Never move all your cryptocurrency in one go - do a test first!
Don't trust anybody with YOUR money. Take responsibility.
I wish you all the best - leave a comment down below if you have any questions. Take your time, learn as much as possible and stay sexy.
What steps have you taken to make your cryptocurrency as safe as possible?