Cryptocurrency exchanges have come leaps and bounds when it comes to security. That said, companies build crypto exchanges online. While this is inherently a risk already, cryptocurrencies’ continued adoption has driven the price of crypto upwards, making it a more prominent potential target for hackers.

Due to the above, many platforms recommend crypto users who want to trade stays on your exchange and the crypto you plan to hold in a wallet. The majority of crypto exchange platforms follow these same practices to minimize potential losses. That said, taking your private keys off an exchange gives the user added responsibility for keeping their coins secure and understanding the inner workings of cryptocurrency storage.

Unlike the wallet traditional consumers have grown used to, crypto wallets operate a little differently. Users can consider a crypto-wallet as a storage device, a physical item, or a digital one that stores a user’s public and private keys. Keys are strings of letters and numbers that facilitate cryptocurrency transactions from one wallet to the next. Below is a brief overview of how crypto wallets work.

Hot wallet

A hot wallet is a crypto wallet that users leave on their computer. Among the most significant advantages of these wallets is that they can facilitate basic cryptocurrency transactions such as making a purchase or trading for new currencies.

The role of a hot wallet isn’t to store a cryptocurrency; instead, it is to facilitate the changes to the record of transactions stored on the blockchain. The majority of software wallets and exchange wallets are of this variety. Crypto held in a hot wallet is believed to be more vulnerable to cybercriminals since users trust their public and private keys on the Internet.

Investors who trade often keep a portion of their tokens in an account linked to a popular crypto exchange. These companies will store the user’s funds within their infrastructure as a “hot wallet provider.” The only downside is that being on the Internet of an attacker gains access to one of these company servers and infiltrates customer accounts; users may experience significant losses. However, users can still be safe when interacting with a hot wallet, depending on their behavior.

Cold storage

Cold storage is often seen as more secure against traditional wallets since it allows crypto to be stored away from Internet access. Although safer, cold storage is less convenient than encrypting an online wallet because it makes it harder for users to access their coins. Cold storage comes in many forms, some of the most common being:

Hardware wallets

A hardware wallet is known to be one of the most stress-free ways to store cryptocurrencies. A hardware wallet is a device that developers designed for the storage of cryptocurrencies. One common example of this is a flash drive. These devices are small and compact and can be carried around with the user wherever they go. A hardware wallet generates private and public keys through a seed word upon initialization.

The main drawback of this storage type is that cryptocurrency cold storage can be expensive. A single device may be $100 or more. If a user has a significant amount of crypto, this can be incredibly expensive. The other major drawback of this method is that these wallets can only store certain currencies such as bitcoin, Ethereum, Dash, Tether, Bitcoin Cash, Ripple, and Litecoin.

Paper wallet

Another effective way to keep your cryptocurrency safe is a paper wallet. A paper wallet is a piece of paper that users can print a QR code and private and public keys. When it comes time to transfer coins, users must manually enter the keys or scan them into a digital trading platform. The only downside to this storage method is that the paper may be lost, damaged, or stolen, resulting in the loss of your coins.

Takeaway

One final word to the wise; your cryptocurrency might increase overnight, causing you to become an instant millionaire. That said, bragging about your newfound wealth can make you a potential target for robbery or, in extreme cases, kidnapping. There is little worse than losing all the value you gained in the crypto market. Therefore, users must educate themselves on the proper safeguarding measures of their investments.