Crypto Security Basics: Understanding Hot and Cold Wallet
As cryptocurrency are in the form of digital assets, does not mean that crypto assets are safe from various risks of getting lost. Like physical assets, investors need to pay attention and secure their crypto assets. However how to secure these assets are very different because these are two different types of assets. While real world physical objects are prone to theft, digital assets are also prone to theft in a cybersecurity way or hacking.
In fact, crypto assets are not protected and not being overseen by the governments, this because of the decentralization nature of crypto assets. While this can be beneficial in some ways, the risks also increase as no powerful central authorities like central banks, government and financial institutions oversee all market activities. Almost every aspect of crypto assets security is the responsibility of each investor themselves.
Cryptocurrency world revolves around the decentralization aspect, which means there are no central trusted entities to secure investors’ assets. In traditional finance, assets such as gold, stocks, bonds and any other commodities are being kept by third parties or custodians. This gives a sense of security to investors because there are entities who keep their assets safe.
In contrast to this custodian and third parties mechanism, the crypto assets can be secured privately and individually by the investors. While this is very beneficial to any investors who love to keep their own assets, however in the process, investors need to be very cautious on securing their own assets. Any particular mistakes handling crypto assets, intended or unintended, may result in the loss of investors’ crypto assets and it is almost impossible to recover loss or stolen crypto assets.
How to securely hold our own crypto assets will be explained here. Investors need to know several unique terms in securing crypto assets, such as:
- Cold Wallet
- Hot Wallet
- Private Keys and Seed Phrases
Cold wallet also known as hardware wallets, are the type of offline cryptocurrency wallet or storage. Cold wallet function as physical tools, providing a higher level of protection for cryptocurrency holdings because it does not connected to the internet, which means no threat of online cyber-security hacks.
The most notable benefit of using a cold wallet is its tolerance to computer virus infections and hacking attempts. Since access to a cold wallet can only be obtained by entering a special alphabetic and numeric combination, which can only be done physically.
An effective hardware wallet guarantees the safe keeping of private keys, since private keys are stored, written, carved or displayed inside a specific locked-down area of the device, making it impossible for them to be removed. An example of hardware wallet devices are Ledger Nano and Trezor.
Please note that though cold wallet are very secure since it does not connected online, as a physical objects, investors may still need to keep the hardware securely. Imagine it as our jewelry or valuable objects which need to be treated safely and carefully.
In contrast to cold/hardware wallet, hot wallet are known as software wallet or online wallet. It is an internet-connected digital wallets that is used to store and manage cryptocurrency. Hot wallet are a practical choice for frequent transactions because it is always connected to the internet, which gives investors easy access to their crypto assets from any device with only an internet connection.
Hot wallets are more susceptible to cyber-security risks such as hacking and computer virus infections due their persistent internet connectivity. Investors are advised against keeping sizable amount of cryptocurrency holdings in hot wallets. Preferably, investors also need to put enough amount of crypto assets into the hot wallet for day to day crypto transactions or investments.
Private Keys and Seed Phrases
A private key functions as a virtual key that gives access to manage investors’ crypto assets. The private key is encoded as a very lengthy number sequence, making guessing it very hard. If investors lose their private key, they may lose access to their wallet, and their funds inside the wallet. Also, if there is another person who learns the investors’ key, they are able to overtake the wallet access from investors’ hands. Keeping private key safe are crucial things investors need to learn in crypto space.
Seed phrases are a series of words that can be easily remembered by humans, to generate the numerous private keys within the wallet. In order to access the keys within the wallet, all investors need to remember are their seed phrases.
Seed phrases are random collections of words ranging from 12 to 24 random words, for example:
Coffee Phones Straw Cold Lights Plastic Bucket Fan Rain Yellow Laugh Bald
Entering the seed phrases grants access to investors’ private key to access their wallet. These random words cannot be replace with another random words, so it is advisable to write down and memorize crypto wallet’s seed phrases
How to Create a Crypto Wallet?
There are 2 types of crypto wallet as we cover before, cold/hardware wallet and hot/software wallet, the creation of both crypto wallet also differ
1. Investor select the desired cold wallet hardware, there are several choices of hardware wallet on the market, investors can choose based on their preference or budget
2. Follow the hardware manufacturer’s installation instructions and configurations, please note that the computer or device the investor used must be clear from any kind of computer viruses
3. Create the wallet account
4. Write down the seed phrases and keep it securely in other private safe. Some hardware also wallet provided tiny space to save the seed phrases
5. Afterwards, investors can funds their cold wallet with desired crypto assets
6. Investor can remove the hardware wallet
1. Create software wallet account, this account can be created on crypto wallet provider or centralized exchanges
2. – If investors create wallet on crypto wallet provide, write down the private key or seed phrases given by the wallet provider – if investors create wallet on the centralized exchanges, make sure to enable the two-factor authentication on the centralized exchanges
3. Investor can funds their account with crypto assets
4. Afterward investors can trade directly from the exchanges or interact with Web3 app if using crypto wallet provider
How to Safely Secure Crypto Assets?
1. If investors hold large amounts of crypto assets, it is advised to choose the hardware wallet, since it is the safest option
2. Combine with the usage of hot wallet, investors can split the low portion of crypto assets into the hot online wallet. This can make it ease the process when investors wants to interact with exchanges or Web3 applications
3. Enable two-factor authentication when using crypto exchanges, this can create another security layer if investors’ exchange account got hacked
4. Back-Up. Human error and computer failure are able to occur unexpectedly. Backing up the wallet, seed phrases and private key in other safe places are advisable since investors can recover their assets on different devices.
5. Diversification. If investors hold all crypto in a hot wallet, it is advisable to create more than one wallet. Lose access to one wallet means investor still have another assets stored in another different wallet
6. Multisignature. If investors are a group of people or a company, it is advisable to apply the multisig security. This enable the participation of another wallet member or another private keys holder in order to access the wallet
Safeguarding of cryptocurrency assets has become a critical part of crypto investments. The widespread adoption and utilization of cryptocurrency requires investors to take proactive measures in protecting their assets from various security threats.