Crypto wallets are the foundations on which cryptocurrency transactions depend on, whether that be for receiving or sending funds to another cryptocurrency user. Cryptocurrency wallets have been around since the beginning of the market; when Bitcoin’s creator Satoshi Nakamoto developed the Satoshi client (later worked into Bitcoin Core) in 2009. The Satoshi client allowed users to create wallets and transfer Bitcoin between them.
Despite the success of the initial wallet generator, problems were common in the beginning.
Since the explosion of popularity of cryptocurrencies in 2017, the number of generated blockchain wallets has increased substantially from 17.2 Million in the third quarter of 2017 to 47.14 Million in the first quarter of 2020. In addition to this, with the bold predictions that the blockchain technology market will rise from $3 Billion in 2020 to $39.7 Billion in 2025, the number of cryptocurrency wallets that are generated is likely to continue to increase massively.
How Do Cryptocurrency Wallets Work?
One of the easiest ways to think about cryptocurrency wallets is to think of them as a safe. We use safes to store our most precious possessions and if you were to lose the key or code to your safe, you would end up losing access to those possessions.
Cryptocurrency wallets work in the same way, although the keys in this sense are digital rather than physical. These are known as private keys and they take the form hexadecimal codes.
Cryptocurrency wallets interact with various blockchains, providing the ability to send and receive cryptocurrencies.
For example, if someone was to send you some Bitcoin, they would be singing ownership of those coins over to your cryptocurrency wallet. To actually receive the funds, the private key in your wallet must match the public address that the wallet is assigned. When these keys match, the amount of cryptocurrency in your wallet will increase. The transaction is then recorded on the specific blockchain.
The hexadecimal code used by Bitcoin creator Satoshi Nakomoto’s Bitcoin wallet can be seen below.
In essence, private keys work in a similar sense to your password with your bank. If you are sending money across to another individual or are partaking in some other activity, your password will be needed. This key will be linked to your specific wallet, so if you use multiple wallets you will need to keep track of your private and public keys. The public key is akin to your bank number, which is used to identify you as a customer.
No physical product or asset is stored within this process. Transactions are completely facilitated by the blockchain, which acts as a distributed accounting ledger; also taking note of the balances of each wallet on the blockchain. This blockchain can not be retroactively changed, which reinforces the legitimacy of transactions on the blockchain.
Some cryptocurrency wallets allow the user to store a variety of different cryptocurrencies within that wallet, whereas others may offer a more limited or even singular option in terms of cryptocurrency compatibility. Generally, a large number of cryptocurrency are built on the ERC-20 token; which means that there is a greater chance of finding a cross-currency wallet built for ERC-20 tokens. It is always recommended that you research the compatibility of each wallet before using it.
Some cryptocurrency wallets come with additional security features which decrease the likelihood of an attack on your cryptocurrency holdings. For example, many wallets support two-factor-authentication usage with Google Authenticator, which means even if an attacker gained access to your private key, they wouldn’t be able to access the wallet without the code.
The success of cryptocurrency wallets as a digital storage for a valuable asset has led some to speculate that there exists a much wider application for the technology, which can be used to store the value of other assets, securities and services. This has been seen with the resurgence of digital gold.
How To Choose The Best Cryptocurrency Wallet For Your Needs?
Each type of cryptocurrency wallet that is available to the public has their own sets of advantages and disadvantages and the best wallet for your needs will depend on your transaction habits and other requirements that you may have.
If you are using cryptocurrencies on a daily basis and you need fast access to your cryptocurrencies, then a mobile wallet may be the best option for you. These types of wallets work from an app on your mobile device and will allow you to pay for items or send transactions directly from your phone. Despite the convenience, you will need to do your due diligence when using a mobile wallet and choose one with a history of good security and fair practices. There are some privacy concerns over the use of the internet, however the internal security on these apps temper this.
Hardware wallets are physical devices run electronically that will generate your public and private keys by using a random number generator. These devices are incredibly secure against online attacks, although security may be compromised if the firmware is not correctly implemented. These types of wallets are useful if you are storing your cryptocurrencies for a long time, as they are not incredibly user-friendly and the act of accessing your cryptos can be more difficult.
Paper wallets are the safest method of storing your cryptocurrencies from online attacks as your keys are simply written or printed onto a piece of paper and never interfaces with the internet. Despite this, there are still risks associated with paper cryptocurrency wallets as they can easily be destroyed or stolen if they are not stored safely and appropriately. They can also be more complicated to use than the other wallets.
Desktop wallets are software programs that you can store onto your computer to access your cryptos. The keys for your wallets are stored on your hard drive and among offline options, they are considered to be a very reliable form of cryptocurrency wallet. Despite this, there are still security risks associated with this wallet type and they are not as convenient as other forms of crypto wallets. If your keys are not stored with an encryption, they can be stolen and your IP address can be hacked.
Web wallets, also known as online wallets, are the least secure form of cryptocurrency wallet, due to the fact that they are always exposed to the internet. Despite this, web wallets are very utilitarian and convenient for storing small amounts of cryptocurrency. Additionally, these types of wallets are able to facilitate rapid transactions and can often manage a variety of different cryptocurrency types. You should always ensure that if you are choosing to use a web wallet, that you do your due diligence as the third party will be storing your cryptocurrencies for you, as opposed to you doing it.
After discussing the advent of crypto wallets and how they work, it is clear that cryptocurrency wallets are critical to the successful widespread adoption of cryptocurrencies.
In line with this, it is estimated that the number of registered blockchain wallets will explode to new heights to cope with the growth of the market. Different individuals will have various trading habits and will benefit from some blockchain wallet types over others, depending on these requirements. From the discussion in this article, you should be able to identify the blockchain wallet type most suitable to you.
Exposing any information to an online network creates vulnerabilities that can be exploited by hackers. In this unsure environment, where hacks are starting to be viewed as an increasingly difficult problem, cryptocurrency holders must know how to secure their digital assets
One of the biggest unique selling points of cryptocurrencies, as it stands, is their high-levels of security and their natural resistance to hacking attempts. Despite this reputation for security, institutions that are responsible for handling cryptocurrencies are generally less successful in their efforts to secure their network. This has led to a number of highly-publicized and incredibly damaging hacks being levied against both cryptocurrency exchanges and wallet providers across the world.
In this unsure marketplace, where hacks are starting to be viewed as an increasingly difficult problem, cryptocurrency holders need to be able to take responsibility for their cryptos. This is in addition to the responsibility that the exchanges and wallet providers have to the customer. As a result, it is more important now than ever to ensure that you are fully aware of how to keep your cryptocurrencies safe before you go crazy on various wallets and exchanges.
The Biggest Crypto Wallet Hacks In History
Coincheck is a provider of both cryptocurrency wallet and exchange services. The company was established in Tokyo, Japan during August 2014 by co-founders Yusuke Otsuka and Koichiro Wada. Since its founding, the company has gone from strength to strength, with Coincheck eventually being the subject of an acquisition by Monex Group, for the value of $34 Million.
Despite the relative success of the company, it has not always been smooth sailing for the Japanese exchange. In January 2018, the company was the subject of an attack by malicious actors. The hackers made off with over $500 Million worth of digital tokens, making this not only one of the biggest crypto hacks to date, but also one of the biggest heists to date. Not much information has been provided on how the attackers managed to breach the exchange’s security, although they have confirmed that it was not an inside job.
There is speculation that the exchange was hacked due to their use of “hot-wallets”, which are cryptocurrency wallets that are connected to an external network. These are more vulnerable to hacking than the disconnected cold-wallets.
Binance is one of the most recognizable names in the cryptocurrency sector, regularly being considered as the largest cryptocurrency exchange in terms of the trading volume. The exchange was founded in 2017, by co-founders Yi He and Changpeng Zhao. The fact that Binance has appeared in this article shows that even the biggest players in cryptocurrency can fall victim to a hack.
In May 2019, it was reported that hackers had targeted the multi-national exchange, making off with around 7,000 Bitcoin, which at the time was worth over $40 Million. What was even more concerning, was that the hackers drained the funds from the exchange in a single transaction. The company treated this as a large scale security breach and immediately began investigating the hack.
Upon investigation, it was discovered that the hackers used a variety of methods to collect a large amount of personal information to facilitate the hack. Thankfully, the hack was limited to Binance’s “hot-wallet”, which only holds 2% of the exchange’s Bitcoin holdings. According to Binance, other wallets were not compromised and the damage would be limited through their Secure Asset Fund For Users, which is an emergency insurance fund.
Bitpoint is a Japan-based cryptocurrency exchange, that is owned by the parent company Remixpoint inc. Japan’s tolerance to cryptocurrencies extends to their changes of legislation and to the fact that all Japanese cryptocurrency exchanges need to be registered with the relevant authorities. Due to Bitpoint’s inclusion on this list, it can be concluded that just because an exchange is legal and registered, does not mean it is completely safe.
On the 12th of July 2019, Bitpoint suspended their services after noticing an issue with their payment systems, with the company later releasing a statement, revealing that $32 Million in cryptocurrency had been stolen from the platform. The exchange was able to locate some of the missing funds, although nobody has been brought to any form of justice for the crime.
The reason for the breach was listed as the unauthorized access to private keys of the exchange’s hot wallet. In the wake of the news, the company stock had devalued by 19% and even stopped trading altogether at one stage. This was due to mass sell-offs in the wake of the hack. The exchange later offered to pay the 50,000 affected customers in cryptocurrency to the value of their losses.
How To Protect Your Cryptos:
Keep Your Private Key Offline:
As has been mentioned previously, exposing any information to an online network creates vulnerabilities that can be exploited by hackers; this is also true to your private keys for your crypto wallet. Your private key should be stored offline and kept in a secure location, such as a safe, or some other location which only you are privy to.
Select a Wallet That Has Effective Security Measures:
The reality is, depending on what type of cryptocurrency wallet you use, your information and your keys will be more or less secure. If you are looking for maximum security, then it may be better for you to use a hardware wallet. Hardware wallets are offline devices and as such are invulnerable to attacks by hackers.
Do Not Use Public Wifi:
If you are utilizing a cryptocurrency wallet on your mobile device, then you need to be incredibly careful and selective about the environments in which you go online. If you are using public wifi, your device has a much higher likelihood of being compromised. You should try to limit your internet usage to private, secure networks to protect your cryptocurrencies.
During the very early stages of cryptocurrency popularity in 2016, there were only 8 million different cryptocurrency wallets created. Since cryptocurrencies have become more popular, this number has jumped to 40 million in mid-2019, which is a fivefold increase over a three year period. As cryptocurrencies continue to work their way into the public’s consciousness, the number of cryptocurrency wallets that have been created will naturally exponentially, potentially at an even higher rate than is currently being seen. As the number of cryptocurrency users requiring wallet services has increased, so have the number of wallet providers across the world. Naturally, with so many options available, it can be hard to understand which wallet is the best one to suit your needs as a user. Below, you can find ways to choose the best crypto wallet that suits your individual needs.
You can download and use desktop wallets on your computer, no matter which operating system you use. In terms of security, they are relatively safe as the wallet can only be accessed on your computer, although as your computer is likely to be connected to the internet, there is always a chance that your private keys may be stolen. It is true that when using a desktop wallet, your seed keys may be kept in a non-encrypted format, which can leave you at risk. This occurred in 2017 when users of Jaxx wallet experienced losses of $400,000 due to this issue.
Online wallets are run on a cloud-based system, which makes them incredibly convenient to use as you will be able to access this type of wallet from almost any location, so long as you have an internet connection. Despite this, storing your private keys online in a centralized manner makes your holdings a lot more vulnerable to attack from malicious actors. Online wallets are normally used by a number of cryptocurrency exchanges and thus cryptocurrency exchanges are regularly being hacked, with as little as eight seriously notable hacks occurring in 2019.
Mobile wallets are incredibly similar to desktop wallets, although as the name would suggest, they are built to work on your mobile phone. With mobile devices being a huge part of the modern world, it isn’t surprising that mobile wallets are some of the most convenient on the market at this time. They are also known for having high-quality user-interfaces. Another benefit of mobile wallets is that your keys are directly onto your device, although with some mobile platforms having questionable security, mobile wallets can be prone to glaring security issues. Some mobile wallets even store keys on a cloud system, leaving them even more open to attacks. A 2017 report by Californian security company High-Tech Bridge demonstrated this lack of security with crypto mobile apps, stating that among 30 different cryptocurrency apps with over 100,000 downloads, “93 percent contain at least three medium-risk vulnerabilities and 90 percent contain at least two high-risk issues”.
Hardware wallets are the premium option for individuals that are looking to hold their cryptocurrencies in the long-term, with their enhanced security features. As opposed to software wallets, a hardware wallet will store your private keys on a physical device. A large number of these wallets are designed to keep your cryptos safe, even on a computer that has been infected.
A downside of hardware wallets comes in the form of their prices.
Paper wallets are a type of physical wallet that allows you to store your keys in print format, usually in the form of a QR code. Despite your initial thoughts, paper wallets are an incredibly secure method of storing your cryptocurrencies as to spend your cryptos, you will need to transfer the funds to a software wallet. One of the main, obvious drawbacks of paper wallets is the fact that they can be destroyed, stolen or lost very easily if they are not stored appropriately, which will lead to the overall loss of your holdings.
The majority of cryptocurrency wallets don’t require you to spend any money to use them, although it should be noted that certain wallets such as hardware wallets will require you to make a small investment to purchase them. If you intend to keep a hold of your cryptocurrency for a long period of time, then it is recommended that you invest in a hardware wallet. An example of lower-end pricing for hardware wallets can be found with the Ledger Nano S at $59 and the Trezor One costing as much as $78.
Making sure that nobody can steal your cryptocurrency holdings is one of the most important factors to consider when selecting your cryptocurrency wallet. When you are analyzing different options for your cryptocurrency wallet, you should research their security features and their reputation. To ensure the highest possible level of security for your holdings, you should consider a hardware wallet. Some additional tips to help keep your holdings secure can be found here.
Ease of Access
If ease of access is most important to you, mobile and online wallets are the most suited to your needs. You can get access to them from any location, no matter what device you happen to be using at the time.
Is the Wallet Multicurrency?
If you are going to be storing a number of different cryptocurrencies, then making sure that your choice of wallet can support this is critical. Typically, when you are looking for a wallet like this, you should check user-reviews to ensure that they have a good reputation. If you are looking to store only one coin, check the coin’s website to see if there is a dedicated wallet already. Hardware wallets generally tend to support more cryptocurrencies than other types of wallets.