A Crypto Wallet Can Help Keep Your Coins Safe. Here’s How to Decide If You Need One
Just like you need a wallet to protect your cash and credit cards, you should also know where you’re going to store your crypto.
When you buy digital currency on a trading platform, or exchange, you may have the option to leave the “keys” to your coins within the account — that’s one form of storage. But you can also move them off the platform to a personal crypto wallet, which may be software connected to the Internet (a hot wallet) or a completely offline device (cold storage).
Here’s what you need to know about cryptocurrency wallets, and how to decide which storage option is right for you:
What is a Cryptocurrency Wallet?
Like a regular wallet stores physical currency when you’re not using it, a cryptocurrency wallet is a place to store your digital currency. “Really all you need to transact in crypto is two things: your wallet address, which is also called your public key, and then your private key,” says Nicole DeCicco, founder of CryptoConsultz, a consulting practice for individuals and organizations learning about crypto and blockchain technology.
A public key is like your bank account number. You can share it with other people or institutions, so they can send money to you or take money from your account when you authorize it. These people usually view your public keys as a wallet address — a hashed, or more compressed, version of that public key.
But a private key is like your bank account password or the PIN to your debit card. “You would not want to give that to me because that would give me access to your account,” DeCicco says.
As a purely digital currency, crypto isn’t directly held within your wallet; instead, the wallet stores information about your public and private keys, which amount to your ownership stake of the crypto. Using these keys, you can send or receive cryptocurrency while keeping your private key encrypted.
Types of Crypto Wallets
Different crypto storage options can serve different purposes, depending on what you plan to do with your crypto. Long-term Bitcoin investors, for example, who plan to hold onto it for a period of time as a store of value may want the security of an offline cold storage wallet. Those more involved in actively transacting with crypto, on the other hand, may want the convenience and speed that an online hot wallet can offer.
Hardware Wallet
These are sometimes called cold wallets or cold storage, and they store your keys completely offline on a device not connected to the Internet. Many popular cold wallet devices look similar to a USB drive. Sometimes paper wallets — wherein you print information about your public and private keys onto a sheet of paper — are even used as cold storage.
Crypto enthusiasts often see cold storage as the gold standard for protecting your digital assets. Because they’re offline, hardware wallets are the most difficult type of wallet to hack. But that doesn’t mean there aren’t still risks. For one, hardware wallets can be easily lost or misplaced. How many times have you lost a USB drive with nothing more than documents on it before? That alone is inconvenient. But losing a device that holds the keys to your investments — which are unrecoverable once gone — can be a big financial blow.
Even hacking can still be a concern. If you do choose cold storage, DeCicco recommends buying a device directly from the manufacturer, rather than secondhand. If you buy from a third party, you could risk the device being tampered with by a hacker who may have bought it, compromised it, and repackaged it for sale.