You need a wallet to secure your cash and credit cards, and you should also determine where you’re going to keep your cryptocurrency. When you purchase digital currency on a trading platform or exchange, you may have the option to keep the “keys” to your coins in your account; this is one type of storage. You may, however, transfer them away from the site to a personal crypto wallet, which can be software that is linked to the Internet (a “hot wallet”) or a totally offline device (cold storage). Here’s what you should know about bitcoin wallets and how to choose the best storage solution for you:

What is a Cryptocurrency Wallet?

A cryptocurrency wallet, like a traditional wallet that saves actual cash while not in use, is a location to keep your digital currency. “Really, all you need to transact in crypto is two things: your wallet address, also known as your public key, and your private key,” explains Nicole DeCicco, founder of CryptoConsultz, a consulting company for people and companies interested in learning about crypto and blockchain technology.

A public key is analogous to your bank account number. You can provide it to other individuals or institutions so that they can send you money or withdraw money from your account when you permit it. These individuals often see your public keys as a wallet address — a hashed, or compressed, form of your public key. A private key, on the other hand, is similar to your bank account password or the PIN for your debit card. “You wouldn’t provide that to me because it would allow me access to your account,” DeCicco explains.

Cryptocurrency, as a totally digital currency, is not physically housed within your wallet; rather, the wallet keeps information about your public and private keys, which equate to your ownership share in the crypto. You may transmit and receive bitcoin using these keys while keeping your private key encrypted.

Types of Crypto Wallets

Depending on what you want to do with your cryptocurrency, different crypto storage alternatives might serve different purposes. Long-term Bitcoin investors, for example, who want to keep it as a store of wealth for an extended length of time, may prefer the security of an offline cold storage wallet. Those who are more actively trading with cryptocurrency, on the other hand, may prefer the simplicity and quickness that an online hot wallet may provide.

Hardware Wallet

These are also known as “cold wallets” or “cold storage” since they save your keys fully offline on a device that is not connected to the Internet. Many popular cold wallet devices resemble USB drives. Paper wallets, which are created by printing information about your public and private keys onto a piece of paper, are sometimes used as cold storage. Cold storage is frequently regarded as the gold standard for safeguarding digital assets by cryptocurrency enthusiasts. Hardware wallets are the most difficult form of wallet to hack since they are not accessible online. But it doesn’t imply that there aren’t some dangers.

For one thing, hardware wallets are easily forgotten or lost. How many times have you misplaced a USB device containing only documents? That is inconvenient on its own. However, losing a gadget that has the keys to your assets — which are irrecoverable once lost — may be a significant financial blow. Even hacking can be a problem. If you do decide to use cold storage, DeCicco suggests purchasing a new unit from the manufacturer rather than a used one. If you purchase from a third party, you run the chance of the device being tampered with by a hacker who purchased it, hacked it, and repackaged it for sale.

Software Wallet

These are also known as “hot wallets.” A hardware wallet is similar to a billfold that you could have in your purse, while a software wallet is similar to your online bank account. “They’re frequently linked to an exchange, they’re frequently user-friendly, and they’ve really opened up the field to a more general consumer,” DeCicco adds. “However, there are several hazards to holding your cash online.”

These are also known as “hot wallets.” A hardware wallet is similar to a billfold that you could have in your purse, while a software wallet is similar to your online bank account. “They’re frequently linked to an exchange, they’re frequently user-friendly, and they’ve really opened up the field to a more general consumer,” DeCicco adds. “However, there are several hazards to holding your cash online.”

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Do You Need a Wallet?

Technically, you are not required to keep your money in cold storage or to install a hot wallet application on your computer. Many cryptocurrency exchanges enable you to keep your bitcoin in an exchange wallet, and some users leave it at that. Is it, however, acceptable to retain your cryptocurrency in the wallet provided by an exchange like Coinbase or Kraken?

“Crypto purists will scoff,” says Tyrone Ross, financial adviser and CEO of Onramp Invest, a cryptocurrency investing platform for financial professionals. However, there is a learning curve with crypto, and it is acceptable until you have a strong grasp of public and private keys, hot and cold storage, and other crypto security subjects. “It’s fine to leave your coins in Coinbase, Gemini, or whatever until you learn all of that.”

The idea, he adds, is to avoid relying on that option and eventually shift your crypto to your own form of storage, but “these are exchanges that have gone above and above for security and safety.” Your cryptocurrency isn’t safeguarded by any regulatory authority, like cash in a bank, but several reputable exchanges, such as Coinbase and Crypto.com, offer insurance coverage on crypto holdings and even utilize cold storage methods themselves. In the event that your cryptocurrency is stolen by hackers or the exchange fails, you have an additional layer of safety for your investment.

Still, there is a danger of hacking. KuCoin (the fifth largest exchange by volume, according to CoinMarketcap) was hacked last year for more than $200 million. Though consumers’ assets were recovered, the incident underlines the risk that any exchange, including established financial institutions, might pose.

According to Kiana Danial, author of “Cryptocurrency Investing for Dummies” and creator of @Investdiva on Instagram, a hot wallet has the same level of protection as your bank account. Exchanges often take security seriously and frequently have insurance to back up their security in the event of an attack. However, the level of power you have over your own coin is a compromise.

Danial compares it to the capacity of your bank to just freeze your account. In a society founded on decentralization and the adage “not your keys, not your money,” depending on a centralized institution (the exchange) to handle the keys to your cryptocurrency might be considered a security concern in and of itself. As an example, DeCicco cites outages observed by account holders during the most recent severe drop in the crypto market. “Almost every exchange went down, just at the time when it’s critical to have the capacity to purchase and sell cryptocurrencies,” she explains. “If you store your assets in an exchange, you don’t always have that option.”

How to Choose the Right Crypto Wallet

When selecting a storage solution for your cryptocurrency, you should consider your risk tolerance and goals, as well as your level of crypto understanding. If you want to keep your coins for a long time and don’t intend to trade them, cold storage may be the best option. However, if you’re a newbie who is concerned about the amount of money you invest, you might prefer the convenience of being able to acquire and maintain your coins within an exchange.

“We tell folks to go to the source and make their own decision about how and where they’re going to interact,” says Eva Velasquez, president and CEO of the Identity Theft Resource Center. Don’t rely on options that you see promoted or for which you receive solicitations in your email. “After they’ve looked into it, is this a legitimate exchange, and are these actual firms offering storage options?” When it comes to individual options, the same rule of thumb applies as it does when selecting a currency to invest in or an exchange to trade on-the more mainstream, popular options are typically ones with less risk.

“I place a lot of emphasis on the platform’s or device’s lifetime,” DeCicco explains. “There might be flaws in the software’s security, which allow hackers to infiltrate. If you have a time-tested wallet, you may be more certain that their security staff is up to date on the newest security techniques. “

Personal Account Security

Like with any other form of internet account, the active security measures you employ may make a significant difference in keeping your cryptocurrency safe. “If you aren’t aware of and practicing best practices for just basic good cyber hygiene,” Velasquez says, citing practices such as updating devices, managing network security, and using multiple passwords, “you may want to consider doing that first before you decide to dive into something new like getting involved in crypto.” Here are a few pointers to bear in mind:

• If your wallet is software-based, update it periodically and avoid using obsolete versions of the program.

• Opt for two-factor authentication, and be sure that any exchange or hot wallet application you use supports it.

• Don’t give out your private key to anyone, just as you wouldn’t give out your Social Security number or bank card PIN.

• Maintain strong passwords that are periodically updated, and avoid using the same password for several accounts.

“We hear a lot about getting hacked,” adds DeCicco. Despite the fact that hacking is a serious danger, “I work with just as many customers every day who have been their own worst enemy.”