Cryptos may hold an intimate value in today’s world but the issue of safe storage remains dicey as it is susceptible to theft and hacks. Cryptocurrency wallets hold private keys, certifies transactions and broadcasts the transactions to the blockchain network.
Unlike fiat currency which is stored safely in banks and other financial institutions, safe storage of cryptocurrencies demand individual responsibility.
Private keys; what are they?
In this lesson we are going to explore various ways in which we can safely store these digital currencies. Security is a must and a private key is just one of the elements that champions the safe storage of cryptocurrencies.
A private key as opposed to a public key is a 64-bit cryptographic infrastructure similar to a password and must therefore be kept secret. It comes in the form of strings of numbers and words which are generated randomly.
Public keys are loosely referred to as wallet addresses and private keys are prove ownership of the address.
Private keys are so important that aside storing it secretly, they must also be kept forever (i.e for the lifetime of the owner). Losing it means losing control of the address it grants protection to.
Private keys should not be confused with seed or recovery phrases. Recovery phrases are a string of 12 to 24 words that generates private keys. In other words, seed or recovery phrases are the human readable format of a private key.
They should be kept as securely and privately as the keys themselves since they can be used to gain access to a wallet. You use the recovery phrase to gain access to a wallet when you want to access it on a new device.
When storing private keys, you can either entrust the custody to an organization or you can keep them in various ways. In entrusting the custody to an organization, you need to be assured enough that they keep their private keys safely.
Organizational custody of private keys.
Organizations come in the form of centralized exchanges. Binance, Coinbase, FTX, Kraken and Kucoin are some of the most popular centralized crypto exchanges; there are a lot more than that. If you choose to store your crypto this way, make sure you trust the company.
Whatever crypto you buy through any of those centralized exchanges will be stored on the company’s wallet. The risk here is that, they are susceptible to hacks and that is why security is key. For instance, Kucoin, the exchange based in Singapore was hacked in September 2020.
This caused a loss of about $280m worth of crypto. To add insult to injury, the hackers also gained access to the private keys of some wallets on the exchange. Kucoin however through its swift action was able to recover more than $204m of the stolen crypto. Read about some of the biggest exchange hacks here.
If you are going to go the route of centralized exchanges, do well to avoid those that have no regulation. Unregulated exchanges may be involved in shady dealings and still go unpunished; they have nothing to lose really.
Self custody(Online or Software wallets).
Another way is to be responsible for your own bags a.k.a self-custody. This is where you take charge of the safety of your crypto holdings and make sure that you keep your private keys safe. Going about it this way is simple as it is computer based.
There are apps that are downloadable on PC’s or phones encrypted with private keys that ensure that your bags are stored safely. Some of the popular crypto wallet apps are Trust wallet and Electrum Wallet. They are downloadable on the IOS and Android stores.
Also, there are web based wallets like Metamask where you can access your wallet by using a browser. The private keys for these wallets are in your own control and you should have the capacity to store them safely and securely.
Online personal storage like these is termed as hot wallets since they are always connected to the web and need an internet connection to be accessed. Your hot wallet is only as safe as you make it since they are also susceptible to theft. You need to do your due diligence.
Safety of online wallets.
The device which houses your wallet should be free from viruses and questionable software. The safer your device, the safer your wallet. Keylogging software is one of those that can be used maliciously by hackers to gain access to your private keys.
Mobile wallets can also be protected with pins and passwords as well as biometrics such as face ID and fingerprints. This adds up to the security always.
Self custody (Offline or Hardware wallets).
There also exists the offline storage of cryptos otherwise known as cold wallets. In this form, the private keys are stored on a USB stick or paper wallet. Paper wallets contain keys and QR codes that are used to make cryptocurrency transactions.
They are easy to come by as you can create one for yourself. Learn how to create a paper wallet here.
USB stick hardware wallets have also been phenomenal in the concept of offline storage. When they are needed for transactions, they are connected to PC’s by a cable or Bluetooth. Since offline storage is not connected to the internet 24/7, they are deemed as the most secure from hackers.
Hardware devices are also protected by pins and/or passwords. For long term holding or large amount of cryptos, they are the most recommended. Some of the most leading companies providing hardware wallets are ledger, trezor and keepkey.
These may be the most secure but they are not devoid of downsides as well. Hardware wallets may be tampered with, so in case you get a new one, make sure that the holographic sticker on it is not broken. Also, ensure that you buy hardware devices directly from the manufacturer or trusted sellers only.
Hardware wallets can also be stolen or damaged and since they are offline until needed, losing it may cause an even greater loss. Therefore, always ensure that you keep them securely in a safe physical space.
The major advantage hardware wallets have over software wallets is how free they are from hackers. However, hardware wallets may not have the capacity to hold a variety of cryptocurrencies that are in existence. Software wallets have the upper hand in variety since they list a lot of cryptocurrencies.
Whichever path you decide to take in storing your private keys is solely dependent on you. As you can see all of the means through which you can keep them have upsides and downsides. The responsibility is on you to do due diligence always.
Due dilligences is when you try your possible best not to click on misleading links that may lead to phishing attacks, make use of 2FA(two factor authentication), keep your antivirus software up-to-date to detect malware and so on.