September 28, 2020

It’s up to you to properly protect your cryptocurrencies part 2

There are two ways to “store” your cryptos, in hot or cold wallets. After, we will detail the characteristics of each one of them and what you are exposed to in each case.

Hot wallet:

The main feature of hot wallets is that they are online. They can be accessed from any device with an Internet connection and are therefore the most exposed to hackers. The exchanges are actually hot wallets.

The private keys are stored in online servers, and the client accesses them with a username and password. If a hacker gets access to the servers, he can steal your information and cryptocurrencies.

Some of these services would be Coinbase, blockchain.com, coinpayments.net, etc.

Cold wallet:

Cold wallets store private keys outside the Internet. There are several subtypes that we will detail below:

  • Application or desktop wallet:

The advantage and disadvantage of this type of wallet is that you can only access it from the computer on which you installed it.

Inside the wallets, there are two types.

Own node: One of the options is to become a node, when installing the wallet you will be directly connected to the network, you will need to download the whole block chain from its beginnings that in the case of bitcoin represents more than 250GB and it will take several days to finish the synchronization.

You get more privacy and bring security to the network by making it more decentralized.

Some examples would be Bitcoin Core, Litecoin core, Mist, etc.

Remote Node: Unlike the previous one, these wallets connect to existing nodes, so there is no need to download the whole block chain or take up so much hard disk capacity, it is much lighter and consumes less computer resources.

We don’t have as much privacy as the previous one nor do we favor decentralization, but it is more practical and friendly for most users. Within these there are also the multi wallets or multi wallets since, by not needing to download entire block chains allows to have within the same application many different cryptocurrencies, without the need to have a large amount of storage space.

Some examples would be Exodus, Coinomi, Cobo, etc.

  • Paper wallet:

It consists of generating a private key and a public key and as its name indicates, printing it literally on a paper normally with a QR code. They can be generated with services like bitaddress.org or offline with a private key generator software.

The paper wallet is ideal for storing funds that will not be used for a long time. As it has a private key and is stored on the Internet, it is considered cold storage.

When we want to use the funds, we will use the private key in some service that allows us to sign operations like Exodus or blockchain.com

Hardware wallet:

Hardware wallets are physical devices that operate without an Internet connection and keep the private keys stored securely. This is why they are considered cold storage.

They are devices designed for this purpose, usually have a form of usb memory with high security that allows to generate private keys offline and that these never leave the device. In case of manipulation, the devices have mechanisms to auto-delete and completely erase the private keys.

The best known hardware wallets are Ledger, Trezor, Keepkey, etc.

Important: It is always recommended to buy these devices from the official pages, because if we buy from a third party we cannot be sure that they have not been manipulated.

This is one of the safest and most comfortable options by far when it comes to cold storage of cryptocurrencies.

The hardware wallets have 2 functions:

  • Generate private keys
  • Signing transaction requests with those keys

Therefore, private keys never leave the device, they simply send a signed transaction. As a feature, the transaction is displayed on the device’s display so that you can verify what you are authorizing to sign to avoid possible hacking by the interception of the transaction.

Conclusion:

When you have the private keys in your possession, you are the true owner of your cryptocurrencies. But it is also your responsibility to back them up correctly, because the loss of the private keys would directly result in the loss of access to your funds.

An interesting way to facilitate the backup of our cold storage wallets, is by using a security standard that is already used as a general rule. This is the creation of the seed or seed phrase.

The seed is a set of words (usually 12 or 24) that are intended to facilitate the backing of our purse in a simple way. Through them, you can calculate thousands of private keys of the different cryptocurrencies.

If you want to learn in detail how the seed works, the different ways to access your funds with it, and how you should protect it properly visit the following article.