This might have never happened to you personally, but surely you’ve heard the story of someone losing their wallet — whether it was at a party, on a bike trip, or just while walking down the street running errands. The day quickly turns into a mess. You have to panic-call your bank to block all the cards you were carrying. Perhaps your driver’s license and identity card were tucked away between the leather, and let’s not forget about all those loyalty cards that you now have to get reissued. This only so the cashier stops bothering you about all the perks you had agreed to a long time ago, not because they actually make a difference.
It’s a big hassle you have to go through, unless you’re lucky and the police department calls you thanks to an honourable citizen turning it in.
This cannot happen with cryptocurrency wallets. Don’t misunderstand; you can obviously lose them, misplace them, and worse, lose the funds held within them (though that’s a different story). However, thanks to the built-in security layer of the so-called “seed phrase” — a randomly generated twenty-four-word sequence — it’s possible to restore a specific wallet on a different device, all the while the lost wallet is worthless to the finder. But let’s start at the beginning.
Shades of Crypto Wallets
A cryptocurrency wallet serves as a digital tool designed to securely store, manage, and interact with various types of cryptocurrencies, such as Bitcoin, Ethereum, Cardano, Polygon, and more. At its core, a wallet consists of a pair of cryptographic keys. On one side lies the public key, which functions as a wallet address, allowing other users to engage with it. On the other side, there’s a private key (kept confidential) utilized by the wallet holder to interact with and manage the stored tokens.
Despite the fundamental principle upon which wallets are constructed, there exists a variety of wallet types that users should consider, particularly due to their potential to offer distinct benefits and risks based on investment and trading styles. These considerations often involve personal preferences, underscoring the necessity for thorough research prior to reaching a decision. Conclusive research is at your own discretion, yet the following segment should provide help to serve as a starting point.
Let’s begin with the most crucial distinction: hot wallet versus cold wallet. A hot wallet is directly connected to the internet, which implies that the stored funds can be accessed at any time (as long as internet connectivity is available on a device). However, this also renders tokens vulnerable to criminal activities. On the other hand, cold wallets store private keys offline, thus shielding them from cybercriminal threats. However, this might prolong the time it takes to access your funds promptly.
Delving deeper into the details, hot wallets are also known as software wallets, including:
– Desktop Wallets: software applications installed directly on your computer
– Mobile Wallets: similar to the former but compatible with mobile phones
– Web Wallets: often provided by Centralized Exchanges (CEX) to their users.
The latter are always referred to as custodial wallets, meaning users entrust their cryptographic keys to a third party (similar to a brokerage platform or a bank).
In contrast, cold wallets are non-custodial wallets, where the keys belong to the user. These can be:
– Hardware Wallets: physical devices (similar to USB sticks) that store keys
– Paper Wallets: physical pieces of paper containing the public and private keys.
Their primary advantage is that the owned keys are stored offline, making them nearly impervious to external threats on the worldwide web. Additionally, these keys can be stored independently from various service providers that are inherently susceptible to market forces and potential failures. Consequently, users can access their keys through a different (new) provider at a later stage.
However, it’s worth noting that safeguarding these crucial access codes (the Seed Phrase, Pin Code, Password) constitutes a vital yet not always straightforward discipline that every crypto enthusiast must learn and adhere to, irrespective of their industry experience.
From Seed to Words
The Seed Phrase of a wallet, whether hot or cold, is essentially comparable to a child you care for. Regardless of your life’s endeavours, you’ll always want to ensure its safety against any potential mishaps. As mentioned earlier, the seed phrase typically consists of a 24-word sequence auto-generated during wallet setup. The application mandates that you record these words in the correct sequence and then reproduce them to verify that you have stored them securely. These words are generated randomly, with the intention of distancing them from your personal identity to prevent guessing. You might question the likelihood of someone guessing 24 words devised by you for the security of your assets, but you’d be surprised. Embrace the fact that this is for your own benefit.
Having said that, once you have transcribed these words onto a physical piece of paper (yes, paper), you must ensure their safeguarding. The paper could be discovered by someone entering your home, accidentally misplaced, or subjected to various disasters such as flooding, fire, or even a vacuum cleaner incident. Thus, it’s imperative to adopt diverse strategies and techniques to fortify the security of your passphrase against both human and non-human incidents.
To start easy, always keep your word sequence offline. Regardless of the circumstances, refrain from entrusting these most valuable words to any digital storage provider. No matter their assurances of safety, the landscape could change by tomorrow. You’ll be better of keeping them somewhere in your apartment or house that only you know about. Other viable options for storage can include a fireproof safe or a secure deposit box, for instance.
For those seeking more advanced measures, encryption of your seed phrase or its division into multiple segments (also known as the “Shamir’s Secret Sharing” method) are worth considering.
The Rule of Rules
Finally, whatever you do, never share your seed phrase with anyone, regardless of any reason they might provide, even if they claim to be assisting you with an issue. If you encounter such a situation, understand that this “helpful” individual is only helping themselves — they are a scammer.
If your wallet is compromised due to falling victim to a scam, experiencing a hack attack, or making an error, the best course of action is to promptly establish a new wallet and transfer your funds (only the tokens you are familiar with) to it.
Hopefully this article has provided useful insights into safeguarding your cryptocurrency funds and has ignited your interest in conducting further research. If that’s the case, the team at Fish and Chips warmly invites you to join our Discord server (https://discord.gg/UZxPcHSJZ7) for additional discussions on this topic and other subjects related to the cryptocurrency industry.
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