4 min read
Cryptocurrency Wallet Basics
Welcome to the third and final article of our intro to wallets series. In this section we will cover some of the important features and qualities to consider while choosing your next cryptocurrency wallet.
This series is a companion resource to our Wallet Finder Tool.
Cryptocurrency isn't stored behind the advanced security, insurance and redundancy systems of banks, but rather stored and secured by the entire network, with each person being responsible for the backup and protection of their own keys. This is great, but it changes how an individuals security should be treated. Losing or exposing the backup phrase can mean a total loss of funds. The only information needed to access and spend funds is the private key - or seed phrase -, and once someone gains access to your private keys there's practically nothing you can do to recover the funds.
It sounds scary 👻, but with a few tips it's simple to keep your assets safe and secure.
Your private key can be represented as a 12 or 24 word long phrase, known as the seed words. Whenever you create a new wallet, make sure to backup these words in a secure place, offline, in a place only you have access to. Most wallet software/apps will prompt you to do this. Please do not ignore this step.
A recommended method is to write the seed words on durable paper with a pen, then secure that piece of paper as if it's extremely valuable. Because now it is.
A more advanced option is to engrave the words into steel plates or other fire-resistant material. For small amounts then storing the phrase in a secure password manager could be acceptable. Mnemonic
Only store enough crypto on your phone for everyday spending. In the same way you wouldn't walk around with your entire bank balance in your physical wallet, it's not a great idea to walk around with your entire crypto balance in your phone wallet. I recommend storing $100-1,000 USD on phone wallets. That way there's always some available to spend, while also not risking too much incase of a stolen, lost, hacked, or broke phone.
The rest should be stored in a separate, secure, hardware wallet.
Online wallets and exchanges sometimes get hacked. It's unfortunate and rare, but it happens so we should minimize our risk. If your crypto happens to be stored on an exchange which gets hacked, then it can all be lost. Be wary of any service which requires holding large amounts of crypto on their wallet. Store your funds in a wallet which you and you alone control, and only store funds on exchanges while trading with them.
When you do need to store your money with an exchange wallet - such as when trading, buying, and selling crypto - it's very important to use 2 Factor Authentication (2FA). Passwords are okay if they are complex, but they are often weak and the target of hacks. 2 Factor authentication adds another layer of security between an attacker and your funds.
It's easy to create a wallet and tell yourself you'll "Back it up later", only to forget about that step completely.
It's a good idea to regularly verify which wallets are backed up, and how they are backed up. I recommend doing this self-audit of wallet backups 1-2 times each year.
Don't tell people what cryptos, and how much you're holding; especially on the 🌈internet🌈. Letting people know how much you have makes you a target for hacks and theft. If someone manages to take your funds, there's very little you can do to get it back, so taking privacy seriously is important.
If someone gives you a wallet, or generates / sets one up for you, DO NOT USE IT. It might be a scam.
Always create your own wallets. Once a wallet is created and the private keys are known, they can always be used to access the wallets funds. One common scam is for someone to "setup" a wallet for you, then months later after you use the wallet and deposit funds to it they steal everything, using the seed phrase
Every wallet makes it trivially easy to create new wallets, so never accept a wallet from someone else.
Due to how much crypto wallets can be worth, they are a very frequent target of attacks. One of the most common ones, is someone copying another wallet, adds malicious code to steal your private keys, then creates an official looking website and convinces people to install their fake wallet.
To get around this, it's always best to verify the website the wallet software is coming from, and verifying the checksums of the wallet download. How to do this is beyond the scope of the article, but this is an important step before installing any desktop wallet.
In the unfortunate scenario which you die, there needs to be instructions or another person which knows how to recover your crypto assets. Otherwise the funds may be lost forever. Depending on your situation, it is a good idea to let a loved and trusted person know how they can recover your funds in the event of disaster.
That's all for the introduction to wallets series for now. A part 4 will come soon focused on maintaining privacy
Hope you learned about the various types of wallet, features to look for, and steps required to keep your crypto safe and secure.
For help choosing your wallet, check out our Wallet Guide.
Cryptocurrency Wallet Basics