In light of the various hacks and liquidations of crypto exchanges and Decentralise Finance (DeFi) platforms, experts advise crypto investors to not keep their crypto funds in any such places. But what other options do investors have?
Well, investors have not just one, but several other options, based on their requirements. But let us first understand why it is not safe to store your crypto in the aforementioned places.
Why should you not store your crypto on an exchange or on any DeFi platform?
It is advisable to not store one's crypto holdings on any centralised platform like exchanges or DeFi platforms. It is because the custody of the funds is with the platform itself and not the investor. Moreover, these platforms are prone to hacks.
In the recent past, DeFi platforms, like the Celsius Network, 3 Arrows Capital, Voyager Digital, Vauld, and other faced financial strains because of which investors' funds became inaccessible. And hence investors are advised to store their cryptos in different types of crypto wallets.
But what are crypto wallets?
Crypto wallets are pieces of hardware or software used to store your crypto assets. Every crypto wallet has an identity, which comprises a pair of private keys and public keys.
What are public and private keys and what do they do?
Public and private keys provide an alphanumeric identifier for your crypto wallet, which is called, your wallet address.
What does a crypto wallet address do?
The crypto wallet address specifies where the crypto tokens can be sent on the blockchain network. The private keys of a crypto wallet are never supposed to be disclosed. The public key is disclosed to sender of cryptos to identify the address.
Crypto wallets can be divided into groups
a) Based on how frequently they are connected to the internet and
b) Based on their technology.
Based on internet connectivity, they are divided into two categories
1. Hot Wallets
Hot wallets are regularly connected to the internet. They are more user-friendly but less secure since they are frequently connected to the Internet. Hot wallets are usually utilised for daily transactions. They offer immediate access to the funds and are easy to set up.
2. Cold Wallets
Cold wallets are not connected to the internet frequently. As a result, they are highly secure. HODLers benefit most from cold wallets.
Crypto wallets are split into two broad categories based on the underlying technology with which they are built
1. Hardware Wallets
2. Wallets for software
Hardware wallets are further subdivided into:
i. USB flash drives
These devices use USB ports to connect to your computer or laptop. Cold wallets are frequently used for long-term storage.
These gadgets use Bluetooth to communicate with your PC, laptop, or mobile phone. Cold wallets are also commonly utilised for long-term storage.
iii. Paper Wallets
The QR codes of the receiver are printed on paper in paper wallets. These are no longer relevant. Their main disadvantage is that they do not permit partial fund transfers.
Software wallets are further classified as follows:
These are software packages that may be installed on numerous operating systems and are becoming more popular over time. Anti-virus protection is required since any computer linked to the internet poses significant security hazards. Desktop crypto wallets are preferable over holding cryptocurrency on an exchange because of incessant hacks on exchanges.
b) Mobile Applications
Mobile apps are similar to desktop wallets. These wallets are designed to be utilised on mobile phones. They are particularly convenient because they conduct transactions using QR codes. They are appropriate for frequent everyday use. However, they are vulnerable to malware attacks. Encryption is required for mobile wallets. They are portable and convenient, yet they are vulnerable to viruses. Two popular mobile wallets are Coinomi and Mycelium.
(c) Browser based wallets
These wallets can be added as browser extensions on your browser. It is worth noting that private keys in the case of browser extension wallets are susceptible to DDOS attacks. They can be hosted by themselves or by a third party. Being self-hosted is preferred since money is always in the investors control. Two examples of browser extension wallets are MetaMask and Coinbase.
Copyright©2022 Living Media India Limited. For reprint rights: Syndications Today