Types of Wallets and How to Secure Them?

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Definition of cryptocurrency wallets

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Whenever you purchase or trade any cryptocurrency, you need an address on the blockchain to store your funds. This is what you call a wallet address, which is also known as a public key. The wallet address comes with a corresponding private key that serves as the wallet's password.

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You need both keys to access the account and transfer funds. Unlike the wallet address, which is meant to be shared with the individuals you transact with, the private key should always be kept secret and never shared with anyone. If the private key gets into someone else’s hands, the safety of your wallet will be compromised.

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Types of cryptocurrency wallets

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There are two main types of cryptocurrency wallets. Each has its pros and cons when it comes to accessibility, security, and convenience.

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Hot wallet

This software wallet can be accessed through a browser extension or downloaded as a smartphone or computer application. Examples of hot wallets are Metamask and Trust Wallet. You can use a hot wallet to send and receive crypto and easily connect to online marketplaces, crypto exchanges, and other sites that require you to sign in with a wallet. Because a hot wallet stays connected to the internet, it can be vulnerable to cyber threats. Hot wallets are best used for short-term storage of small amounts of crypto.

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Cold wallet

When you need to store large amounts of crypto in a safe place, the best option is to choose a cold wallet. This is a hardware device that you plug into your computer or smartphone. Unlike hot wallets, cold wallets are mostly kept offline and disconnected from network devices. They are also protected by a security code. This makes cold wallets more secure and a better option for the long-term storage of large funds.

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In contrast with hot wallets, which can usually be set up for free, the price of a cold wallet typically starts at a few thousand pesos, depending on the wallet provider, its features, and the level of security it offers. Trezor and Ledger are two of the most popular cold wallets available.

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Common risks associated with cryptocurrency wallets

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Like other digital assets, using cryptocurrency comes with several risks. Here are some of those risks that can compromise the safety of your wallet:

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Malware

Clicking on suspicious links while browsing the internet, connecting your wallet to malicious websites, and accessing your wallet through a shared device are just some ways you can unintentionally download malware that gives hackers access to your wallet. Malware may also come in the form of NFTs with malicious code intended to steal your private keys and drain your funds.

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Scams and phishing sites

Links sent via emails, direct messages, or social media can redirect you to phishing sites that look nearly identical to genuine marketplaces, exchanges, or other sites. If you attempt to log in by entering your wallet information, hackers can steal this data and access your account.

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Losing your seed phrase

A crypto wallet may be custodial (managed by a third party for the user) or non-custodial (fully managed by the user alone). If you forget the password to a custodial wallet, you can ask the wallet service provider to reset it. But if you lose the seed phrase to a non-custodial wallet, you permanently lose access to your funds.

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Bugs

Wallets may contain errors in their code that cause them to malfunction or vulnerabilities that hackers can exploit to steal your funds. To avoid this, stick to wallets from reputed service providers with a good track record.

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Security breaches

Crypto kept in a wallet can be stolen if the wallet provider’s system experiences a security breach. Crypto exchanges are more likely to be victims of these attacks.

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Theft

If a hacker steals the device connected to your wallet, they can steal your wallet credentials and access your funds.

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Sending crypto to incorrect addresses

Even with the best security measures in place, you might accidentally transfer funds to the wrong wallet address if you're not careful.

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Best practices for protecting cryptocurrency wallets

• Write down a copy of your seed phrase and keep it in a secure offline location. Do not keep a copy online or on your device.
• Use cold wallets for storing the majority of your funds. Only keep a small amount of crypto in hot wallets.
• Diversify your portfolio. Spread your funds across several wallets.
• Don’t click on links from unknown senders; always double-check website URLs.
• Stay updated on the latest scams in the crypto space, and learn from them.

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What to do if your wallet is compromised

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If you suddenly notice unusual activity in your wallet, such as strange transactions or missing funds, there is a chance that your wallet has been compromised.

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If possible, report the incident to the service provider. Immediately change your password if you can. If you still have funds left, make a new account and transfer them there. Run a malware scan on your device to prevent a repeat of the problem. Avoid using the compromised wallet again unless you are sure that it is safe to do so.

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Choosing to transact with crypto comes with many benefits, such as fast cross-border remittances and integrations with other blockchain-based assets like NFTs. However, it is not completely free of risks, and it is our responsibility as crypto users to make the right choices to keep our hard-earned funds safe. 

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