By Karsten Klein
Updated on August 21, 2018, 17:41 PM

How to Choose a Crypto Wallet


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In the traditional financial system, you can put your money in a bank and feel a measure of confidence that it is safe. This is not always the case in the cryptocurrency world.  You can store your money on a cryptocurrency exchange, but what happens if that exchange gets hacked?  It would be wiser to diversify your risk and store your money across different cryptocurrency wallets.


Cryptocurrency wallets contain your private keys, which are passwords that are known only to you. So technically speaking, it is your key, not your crypto, that is stored in a wallet.


There are various types of wallets in the market, and here’s a brief guide.


Hot Wallets


Hot wallets are wallets that are connected to the Internet. You can access your hot wallet from a laptop or mobile phone. The main purpose of hot wallets is to trade cryptocurrency. Some wallets are designed for multiple currencies and others are designed for a limited selection of coins.


Hot wallets can be fast and convenient to use, but since they are connected to the Internet, they are vulnerable to hacks. The hack of Japan’s Coincheck exchange, for example, led to a loss of over US$500 million.


A desktop wallet can be installed on your computer and provides you with full control over your coins. Security is up to you. If your computer gets hacked or you have a hardware failure, you may lose your coins. To reduce the risk, you can use a dedicated computer that runs only a limited set of software, and only connects to the Internet when you trade your coins.


An online wallet can be accessed from anywhere by a variety of devices, but security depends heavily on the online wallet service provider.


Mobile wallets let you access your coins via your mobile devices.  There are two options.  The first is to install an app and keep your coins locally on your device. This has risks similar to those of the desktop wallet. The second option is to use an app that provides access to an online server that contains your coins. This has the same advantages and disadvantages as an online wallet. In both cases, 2FA (two factor authentification) is typically offered.


You should only keep a small percentage of your cryptocurrency in a hot wallet.  A safer option to store your crypto is to use cold wallets, which are described below.


Cold Wallets


Cold wallets store your private keys offline, and include both hardware wallets and paper wallets.


A hardware wallet is a physical device like a flash drive that is only connected to the Internet when you trade your coins. The risk of being hacked is limited to the time when the device is connected. Sometimes these wallets  have a special feature that requires you to confirm a transaction by pressing a button on the device. Still, these wallets aren’t perfectly secure. If your device is physically damaged or stolen, your money could be lost.  


Paper wallets are what they sound like: a piece of paper that contains your private key or QR code. The QR code can be generated using a service such as Bitcoin Paper Wallet. The paper wallet has a reduced risk of hacking, and the cost of storage is very low. But like a hardware cold wallet, paper wallets are also vulnerable to physical theft or damage, like in a fire. Or if you leave your paper wallet on your desk, and hackers access your mobile phone or desktop camera, they could see your QR code and use that information.


Best practices


There are few simple steps that can help you reduce your risk. The first is to keep only a small amount of your coins in hot wallets and split the rest between different cold storage wallets such as hardware and paper wallets.  The second point is to consider a multi-signature (multisig) address for wallets that contain large amounts. To release a payment, more than one person has to sign off on the transaction. Multisig wallets are used often by institutional investors, like fund managers.


Multisig wallets guarantee that no one person can walk off with all the money. The downside is that there is a minimum requirement for people to sign off. If there are five people with access to a wallet, at least three people might be required to sign off on a transaction. If those three people disappear, then the other two are out of luck.


In addition, you might want to make a survivability plan with your family or a lawyer so that your wallets can be accessed in case of incapacity or death.


Where is the iPhone of wallets?


Many people in the crypto community are not happy with the current state of crypto storage. Hot wallets have security issues because of their attachment to the network. But cold wallets put too much emphasis on physical objects that can be lost or destroyed.  


There are some secure wallets out there, but they are not user-friendly. Many wallets are made for tech people, not for the mainstream public. Users frequently are not able to move their coins from their exchange account to a cold storage.  They don’t know how to navigate the process and are afraid to lose their money. These kinds of wallets are in urgent need of a better user interface. They don’t compare to the iPhone experience, in which virtually anyone can figure out how to navigate the icons on the screen.


Wallet makers can’t solve this problem on their own. Greater user awareness is necessary, and this begins with more  widespread knowledge of the limitations of different wallet types. The great thing about cryptocurrency is that it is controlled by you, not by a bank. Use that power wisely.


Karsten Klein is the founder and CEO of Klein K.K. Advisor Services, Japan.


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