Selecting a digital wallet is the first step of obtaining cryptocurrency, like bitcoin. Unlike traditional money, cryptocurrency exists only online. There aren't any physical bills or coins that represent the value of cryptocurrency. To hold this digital asset, you need to have a digital wallet.
Wallets serve two functions. 1) They provide a location for people to send and receive cryptocurrency, and 2) they store private keys.
Cryptocurrency is made up of a private key and a public key. Each private key is unique and known only to the owner, whereas the public key is recorded on the blockchain and made public. Private keys are like a coin-owner's signature and are needed to authorize transfers.
If a private key is stolen, the cryptocurrency associated with it can be transferred without the rightful owner's consent. That's why you should carefully consider the type of wallet you need, who can access it, and how to keep it secure.
Types of Cryptocurrency Wallets
When choosing a wallet, think about your needs. Some wallets make it easier to access cryptocurrency on the go, while others focus on long-term security.
- Mobile wallets are popular with people who use or exchange cryptocurrency often. These wallets can be installed like an app on smartphones. Although convenient, this type of wallet may not be the best option to store large amounts of cryptocurrency. Lost, stolen or hacked phones can easily compromise the security of a digital wallet.
- Cryptocurrency exchanges are websites that allow people to exchange traditional fiat currency for cryptocurrency for a fee. Exchanges aren't actually wallets, but many include a wallet feature. Exchanges are very convenient, but the security depends on the exchanges themselves. These websites can be, and have been, hacked. When this happens, users may lose all cryptocurrency kept on those sites.
- Desktop wallets store private keys on an individual computer by downloading specific software. This type of wallet is more secure than mobile wallets, but only as long as the computer is not infected with any malicious virus or software.
- Hardware wallets store private keys on an external storage device, like a USB. This type of wallet is good for security because the private key is stored offline and less likely to be hacked.
- Paper wallets are often considered the most secure way to store cryptocurrency. The private key is printed out on a sheet of paper. The user can then keep this paper in a bank safety deposit box, safe at home, or another secure location. This method is more secure because the key is not held on a platform that can be accessed through hacking.
The challenge of picking a wallet is finding the right balance between accessibility and security. Many people use a combination of wallets. For example, small amounts of cryptocurrency can be stored in mobile wallets for daily use, and larger amounts can be stored on more secure wallets for longer investments.
Who Should Have Access to Your Wallet
Controlling who has access to your wallet is just as important as picking the wallet type. Your cryptocurrency becomes less secure as more users have access to it. Unlike traditional money, it's almost impossible to retrieve lost or stolen cryptocurrency.
If someone hacks into your bank account and steals your money, your bank will attempt to recover your funds. With cryptocurrency, there is no bank or central authority. It's up to the user to make sure his or her wallet stays secure.
Limiting user access is one way to keep your wallet secure. Although the best option may be to restrict wallet access to only yourself, it's a good idea to have a plan in place for someone to help manage your cryptocurrency in the event of an emergency or if you become incapacitated.
Keeping Your Cryptocurrency Secure
As the value of cryptocurrency has increased so has the incentive of hackers to steal it. As a result, hacks and scams are becoming more sophisticated. Here are several steps you can take to help secure your digital wallet:
- Don't share access to your wallet with anyone else. Adding another person that can directly access your account adds another vulnerability for someone else to exploit. Instead, create a written plan for someone to access your wallet in the event of an emergency. This plan can be kept with your other estate planning documents, such as your power of attorney.
- Create a new email address dedicated just for your cryptocurrency affairs. Emails are easy targets for hackers. The more traffic an email address has, the easier it is for malicious emails to slip through. All it takes is clicking on an emailed link to give someone a backdoor into your computer. This is a common way wallets are breached. Using a dedicated email just for cryptocurrency will limit traffic on the account and will make it easier to spot suspicious emails.
- Use a strong password. Passwords are the first line of defense against someone breaking into your account. Never reuse an existing password to secure your wallet. If an account with a recycled password is ever breached, all other accounts that use that password are vulnerable.
- Be wary of accessing your wallet when connected to public WiFi. Most free WiFi spots are not secure, making it possible for someone to monitor your activity and all data exchanged. Instead, keep your connection secure by using trusted sources of WiFi, your phone's data, or a VPN.
Bottom Line on Bitcoin Security
Picking the right kind of digital wallet for your needs is the first step in successfully using cryptocurrency. Make sure you take the time to research and find the best option for your circumstances. Whatever wallet you decide to use, keeping your coins secure is an ongoing responsibility that can't be neglected.