Understanding Crypto Currency Wallets: What You Need To Know

If it’s connected to the internet it can be hacked. Whatever it is.

Using cryptography, blockchain technology and various other methods companies can reduce the risk of being hacked to almost zero, but the fact of the matter is that bad actors and hackers all over the world can potentially compromise the security systems of almost any company.

According to CNN, “A staggering $1.9 billion worth of cryptocurrency was stolen in hacks of various services in the first seven months of this year, marking a 60% increase from the same period in the year prior, according to a report released Tuesday from blockchain analysis firm Chainalysis.”

I did a quick google search that returned the largest cryptocurrency hacks to date to be:

Bithumb: $30 Million.

Coinrail: $37.2 Million.

BitGrail: $195 Million.

Coincheck: $534 Million.

Hackers definitely want your crypto.

Cold Wallets (wallets that are not connected to the internet) are the safest way to store your cryptocurrency. The reason for this is that you have full control of the private keys to these wallets. There are many ways to keep these keys safe, whether by storing in a safety deposit box or somewhere in your home, and in a separate hiding place to the USB that stores your crypto.

Hot Wallets on the other hand are connected to the web, generally through laptops, mobile devices or exchange wallets. As mentioned, these wallets are susceptible to theft and ultimately the control of the security lies with a third party as opposed to yourself.

There are certain advantages to using hot wallets, for example if you are transacting regularly or trading regularly. Crypto transactions still incur transaction fees, so the costs of transferring your funds between hot and cold wallets on a regular basis to transact with, or to trade, is going to add up in the long run.

Parallels can be drawn between savings accounts and debit accounts in terms of hot and cold wallets – hot wallets should be used to store relatively low amounts of your cryptocurrency for transacting and trading with (like with your debit account) whereas cold wallets should be used to store large amounts of your cryptocurrency (like savings accounts) so that they are safe and secure offline.

A big drawback from using cold wallets is that if you lose your private keys you lose your crypto. I know people that have done this in the past and it’s very upsetting to see. That being said, you need to weigh up the pro’s and cons of being the person who is solely responsible for the security of your crypto – do you want to be in control of your assets or are you willing to hand over the security of your assets to someone else?

 Depending on a range of factors you may or may not decide to go down the cold wallet route:

Value of assets – if your entire portfolio is worth $100, it may not be worth the time and transaction fees of transferring your crypto into a cold wallet. If however you’re hodling several BTC, you should 100% be moving these funds offline.

Use case of crypto – as mentioned, if you are transacting small amounts little and often, it may make more sense for you to keep your funds online with a reputable hot wallet provider. Again, if you’re buying and selling big, and hodling, go cold.

About Me

I’m Jamie, 35 years old and living in Australia. I got into cryptocurrency in 2018 shortly before the $20k high and subsequent bear market, and when you could buy 1 ETH for $300 (my first investment). Since then I have dabbled in most things crypto-related: leverage trading, minting and selling NFT’s, ICO’s… I’ve been scammed (several times), attempted various trading strategies (from hodling to 100x’ing a trade) and introduced many people to crypto.