By now we all have heard that exchanges are not wallets and that if you are not actively trading you should move your coins to a “real” wallet to prevent losing them in case the exchange gets hacked. It’s understandable why some people, including me sometimes, go against this golden rule and leave at least some coins on exchanges, wallets can be complex and sometimes cumbersome but the bottom line here is you, and only you, should be responsible for securing your crypto assets and trusting a third party for it, whoever it may be is never a good idea.
On this article I will introduce the most common types of wallets you find out there and give some tips on how can you improve the overall security and privacy. I roughly divided wallets in four categories let’s talk about each one:
Full node wallets – These are the ones that by far offer the most control over your assets. With them you have a full copy of the blockchain running locally in your machine, but for Bitcoin for example, unlike many assume, you don’t download the blockchain you BUILD it, from scratch. That means that no matter the software you pick it comes only with the genesis block, from there your node will request all subsequent blocks to the latest and through this process will verify each block. This process can literally take days and will consume a good bunch of resources, broadband and computation during the building process and a good bit of storage afterwards. However if you want to have full control of your coins that’s the way to go, once your node is fully synchronized it will verify your own transactions and broadcast them to the network. It’s also recommended that your node/wallet runs 24/7 otherwise it will have to catch with the latest version of the blockchain every time it comes back online and it can delay your transactions.
Software, mobile and online wallets – These are quite common they do the work but you got to take some extra precautions. Always download a wallet binary from a provider you trust, for Bitcoin goes to bitcoin.org and for alts the coin/token official website or official Bitcointalk announcement. If it is a brand new altcoin be extra careful once the whole project could be a scam to make people download and install a wallet containing a virus/malware. Wait until you hear feedback from others or download and install it on a virtual machine separated from your main machine and your other wallets. Same applies for mobile wallets, check the reviews and only download the official application. For mobile wallets is also important to keep only a small amount of coins on the wallet so in case you lose your phone your loss won’t be too big. Finally online wallets like MyEtherWallet require even more caution once they can be subject of DNS hijacking attacks which is when DNS servers of the domain are compromised and start pointing to a fake website. In this scenario you typed the correct URL but the tampered DNS servers will redirect you to a fake version made with the objective of stealing you keys and password. A good way to make sure you are accessing the correct website and not a tampered version of it is to always check the certificate at the top (beside the URL).
Also very important is to never forget to backup your wallets in at least a couple of different places so in case your computer dies or you lose your phone you will be able to recover your funds.
Paper wallets – Now entering in the realm of cold storage wallets we have the most basic one, a paper wallet. The name says it all, it is a wallet on paper. When generated in the correct way it is extremely safe, a great option for long term hodlers. Main precaution here is to always generate it from an offline computer so your private keys will be protected from keyloggers and screen loggers. Again never forget to backup it in a couple of different places and make sure the original and backups are kept safe so no one but you have access to them. Paper wallets have your private key in an unencrypted format so whoever has access to that piece of paper will be able to spend your coins.
Hardware wallets – They offer by far the best balance between safety and practicality. Hardware wallets are small devices made with the single purpose of storing crypto assets. When using them your private keys are created inside the device and they never leave it, you use an USB port to connect it to your computer or phone and sign transactions. The two main manufacturers are Trezor and Ledger and each of them have more than one model available for purchase. Trezor One and Ledger Nano S offer the best cost x benefit ratio in my opinion. Hardware wallets allow you to make safe transactions even on compromised computers, they come with a built-in display where you can check and authorize transactions and you can even combine them with software and online wallets. Hardware wallets are complex machines and deserve a whole post for themselves, if you have anything more than $100 in crypto I’d highly recommend you to get one.
I hope this brief introduction to this new type of wallet covered your basic questions and gave you a starting point in order to understand the management of crypto assets better. In case you have any questions please get in touch here.