Most of us use a physical wallet to hold our ID, cash and some bank cards. We keep it with us, we keep it safe, it makes it easy for us to spend or receive dollars. In order to spend and receive bitcoin, or other cryptocurrencies, we also need a specialized cryptocurrency wallet. There are hundreds to choose from and they vary considerably.
All cryptocurrency wallets have two essential components: the public key and the private key. The public key lets you receive and verify your funds, the private key lets you spend them. It is important to recognize that anyone that has access to the private key has access to your funds. Own your keys, own your funds. If you do not own your keys, you DO NOT own your funds.
As with anything valuable, there is a risk of loss or damage. Wallet developers address these risks in different ways. However, the primary security feature is you. Make sure that you establish a very strong password for your wallet platform and ALSO integrate two-factor authentication (2FA) protocols, available on most platforms.
Hot vs Cold
Hot wallets are connected to the internet. There are many options to choose from. These are the most widely available and are most often free. Hot wallets are necessary for moving funds around a network and offer certain conveniences. They have various levels of security available.
Cold wallets are removed from the internet. This prevents the funds they contain being compromised by hacking or malware, but also makes them more cumbersome to use. The most popular and trusted cold wallets utilize a hardware platform, similar to a USB drive, that has its own proprietary security protocols granting access only to the owner. While these attempt to be user-friendly, they often are not. The hardware requires firmware updates, the pin numbers and passwords can be lost or forgotten. The device can be misplaced or damaged.
The original cold wallet is simply paper. Writing down your public key and your private key on a piece of paper and keeping that safe and secure is a viable option for storing and receiving your digital assets. Sending them requires some software interface.
Is a Wallet Just a Wallet?
Wallet platforms are evolving. Many allow cryptocurrency exchange, many allow simple swaps, some allow you to link to a bank account, some are just for sending and receiving, most allow multiple currencies, none allow all of them. As the wallet is the primary user interface to the cryptocurrency markets, we do expect to see the options and features multiply over the next few years.
Is my Account Balance at a Trading Platform, my Wallet?
Sometimes yes, most often no. If you are able to remove your cryptocurrency freely in and out of your account, then it is likely that you own the private keys and therefore own your funds. If there are barriers to moving your funds, like fees, or swaps, or restrictions, then most likely you do not own your keys therefore you do not own your funds. Be very careful leaving your cryptocurrency on a trading platform.
The Hybrid Choice.
There may be several, but we are most familiar with one wallet that blends the simple air gapped technology of the original paper wallet with the convenience of an App user interface. This is the Ballet wallet. The private key exists only on a hidden code embedded on a thick metal card that you need to keep in a safe location. If you ever need to spend your funds you need access to that embedded code. However, for receiving funds and verifying your account balance you may use their integrated app.
These are enhanced security hot wallets. They require two or more private keys to send funds. This eliminates the risk of a single point of failure. Most wallets suffer from this risk. If a criminal steals your paper wallet, they own your funds, if they manage to hack your phone and access your private key, they own your funds, if you lose your hardware wallet, you lose your funds. Multi-signature wallets are the safest way to store long term funds. They are also the best way for businesses or organizations to manage a treasury account wallet.
LUXOLO uses multi-signature wallets in our Digital Asset Wealth Management platform. While we are contractually obligated to consent to our client’s requests, we provide an additional layer of security to prevent theft. We are also available to offer assistance to our clients for accessing or managing their portfolios. Learn more about our Digital Asset Wealth Management services at https://luxolo.io/wealth-management/, or contact us today for additional information.