How to Best Keep Your Crypto Assets Secured and Protected
The evolution of Web 3.0 is turning the world of data and finance on its head. But, when it comes to security, the decentralised blockchain model has limitations:
- $140bn of Bitcoin is locked in wallets to which the owner has permanently lost the digital key (according to crypto data firm Chainanalysis).
- 2021 saw 20 crypto exchanges hacked for more than $10m (NBC News).
- February 2022 saw $320m of crypto hacked from DeFi provider Wormhole (Wired.com).
What do Crypto Wallets do?
So what is the safest way to hold crypto? One way is to use service providers which have the equivalent security of a tier-1 regulated bank. This amounts to information security standard ISO/IEC 27001. This signifies that a gold-standard combination of physical and virtual protocols are in place. Such a high level of protection is expensive for the provider. So generally only companies with something solid to offer their clients can afford it.
If you want direct access to your own crypto, you will need to use a crypto wallet too. Here is how they work …
The main purpose of crypto wallets is to allow you to store, send and receive crypto. They allow you to pay for things online, as well as receive payment yourself.
Crypto wallets are generally free, but some charge commission on crypto transfers. What are known as ‘gas fees’ also apply. Gas fees are charges levied by individual blockchains, and depend on what type of crypto you are moving.
What do all Crypto Wallets have in Common?
Unlike a physical wallet or purse that stores currency notes and coins, a crypto wallet does not actually store currency. Crypto is stored on one of the many blockchains online. Technically speaking, a crypto wallet stores your registration rights to some of that crypto.
All crypto wallets have two things in common:
- A public address on the blockchain
This is called the public key. You give this public key to other parties so they can send you crypto — just as you would give somebody your email address for them to send you information. - A private key
This is the sole way of accessing the crypto at your public address. You never give your private key to anybody — just as you would not give your email password to anybody.
Neither public nor private keys are physical keys. They are virtual only: snippets of computer code. Each code represents an astronomically large number. It is often expressed as a QR code, a written phrase in English, or hexadecimal code (which is a way of showing large numbers using both numbers and letters).
Anybody can send crypto to a public address. But only with the private key can somebody prove ownership of the crypto at that address and make decisions about its use.
‘Hot’ vs. ‘Cold’ wallets: Features
The two main types of crypto wallets are ‘hot’ wallets and ‘cold’ wallets.
Hot vs. Cold Wallets: Pros and Cons
Hardware Wallets
Most cold wallets are hardware. That means they come in physical form. The top hardware wallets on the market (like those provided by brands Ledger, Nano S and Trezor) look like USB dongles.
There are two further variations of cold wallet:
Desktop wallet (like the Electrum wallet)
This uses the desktop to store your private key. Its use depends on disconnecting from the internet to authorise transactions.
Paper wallet
This has a misleading name. A paper wallet is not a physical paper wallet! Rather, it describes i) a public address where crypto is registered and ii) a private key which is kept on paper. The two are then used in combination.
Secure your Crypto Assets — Best Practice
☑️ Use more than one wallet
Deploy a ‘chain wallet’ security system. Use a hot wallet for trading and a cold wallet for storing your crypto. Only access your cold wallet to move crypto in and out of your hot wallet.
☑️ Lock your cold wallet up in a physical safe.
☑️ Lock your paper keys to your cold wallet in a separate safe.
☑️ Do not give your private keys to anybody!
How are Crypto Service Providers Secure?
Some crypto providers are not secure — as the $320m hack of DeFi provider Wormhole recently showed.
Whether it is an exchange exchange or a provider of high-yield investment opportunities, make sure your online crypto partner:
☑️ Has tier-1 regulated bank security. Does your provider know what ISO/IEC 27001 means? If not, forget them.
☑️ Keeps operational and trading computers physically separate.
☑️ Keeps crypto in cold wallets.
☑️ Keeps cold wallets and keys separately locked away in physical safes.
☑️ Offers financial insurance to guard users against freak security events or breaches.
☑️ Offers up-to-date ‘KYC’ protocols. KYC means ‘Know Your Customer’ and aims to keep fraudsters out using ID and facial verification checked against lists of sanctioned individuals and companies.
