Virtuality is one of the best features of cryptocurrencies. Other forms of money can usually be touched or seen, but cryptocurrencies don’t have any physical embodiment. This means that it doesn’t come in the form of coins or paper. However, cryptocurrency – like anything valuable – needs all the protection it can get. For any transaction to work, an internet connection needs to be established. This means that it becomes very vulnerable to hacking during this time. Even if cryptocurrency is virtual, there’s still every chance for hackers to steal it – just like the regular fiat or gold. That’s why it’s important to find ways to safeguard your cryptocurrency.
The primary function of cryptocurrency wallets is to make sure the public and private keys needed to process a transaction on the blockchain remains safe. There are different types of cryptocurrency wallets that serve different levels of protection to users.
Types of Cryptocurrency Wallets
1. Electronic Wallets
Electronic wallets can be hosted in the cloud or can be downloaded as a software. This software is a formatted file that is on a computer or device. Cloud-based wallets have a better interface, but the problem is that a third party will be with your private keys.
2. Software Wallet
With a software wallet, you can have access and control to your private keys. Most of them are free and the configuration is easy. However, these wallets need more backup maintenance. You’ll lose your bitcoin if your computer is corrupted or stolen without you storing your private keys elsewhere.
3. Online Wallets
These online (or cloud-based) wallets provide more ease than its other counterparts. As far as they have the correct passwords, users can access their bitcoins from anywhere and on any device. The obvious disadvantage is its low security. Your private keys are stored in the cloud, so you’ll have to trust the security measures put in place by the host. You’ll also have to trust that they won’t disappear with your money or deny you access if they shut down.
4. Mobile Wallets
These are mostly applications for smartphones that are useful when owners of bitcoin want to use it to pay for something in a shop, or if they want to buy, send or sell while they’re on the move.
5. Hardware Wallets
These are small devices that only connect to the web once in a while to process bitcoin transactions. This is the most secure of all the cryptocurrency wallets due to it being offline most of the time. This means that they’re generally not hackable. However, they can be easily lost or stolen if they’re not kept in a very safe place. If this wallet is stolen, its owner will lose the bitcoins stored in them. To curb this threat, some large investors even store their hardware wallets in the vaults of banks.
6. Paper Wallets
This is the most simple “wallet”. Private and public keys of a bitcoin are written or printed on pieces of paper. This is suitable for storing of bitcoin on a long-term basis (as far as they’re kept away from water and fire). They’re very secure because they’re not connected to any network, but they’re easier to lose or be stolen.
How to keep your Bitcoins safe
We’ve already said that every Bitcoin address has a public and private key. Public keys are used to derive bitcoin addresses, and these keys can be shared. This is because a public key cannot be used to get into a bitcoin wallet – it can only be used for the transfer of bitcoins.
The private key is responsible for taking bitcoins from a wallet or sending them to users. This key is what should be protected to ensure that the bitcoins are safe. Anyone in possession of the private key can be regarded as the owner of the bitcoins located at that address.
You can protect your private keys (and ultimately protect your bitcoins) by doing these:
- You can encrypt your bitcoin wallet with a private key, but this is the most basic level of security. It can be breached by viruses or hackers. Some users decide to keep their access completely offline by keeping their private keys in offline databases.
- You can decide to use a multi-signature address that allows different people to hold bits of an address to key. They can also hold one of several keys connected to one address. All the holders will have to approve every single one of the transactions.
Each of these ways to secure bitcoin wallet private keys have their advantages and disadvantages. Users will have to weigh these pros and cons to decide which of them to use. The most important thing is to ensure your coins are safe in a way that you can access them while also keeping out hackers and other extraneous situations.