The arrival of cryptocurrencies has suddenly added a whole new dimension to the cybersecurity space. With cryptocurrency hacks getting increasingly common with every passing day, users need to ensure that their funds are as secure as possible – and cryptocurrency exchanges no longer seem to be a safe space. One of the safest means to secure your cryptocurrency holdings is by making use of a hardware wallet.
Cryptocurrency exchanges, despite their tall claims, are not fail-proof. Hackers have been known to breach the biggest and the toughest of security barriers. Earlier this year, we saw the biggest cryptocurrency exchange hack of all time as Japan’s Coincheck lost over half a billion dollars in cryptocurrencies. In another recent attack, the Zaif crypto exchange lost $60 Million worth of cryptocurrencies just last month.
Cryptocurrency wallets have a private key which is the most critical part of accessing the wallet. In case of cryptocurrency exchanges, the key is either stored on their server or with a third-party server working in liaison with them. In this case, if the server is compromised (either of the exchange or of the third-party service provider, that means that your funds are at a risk). However, no such problem can emerge with a hardware wallet.
Let us take a closer look and understand what cryptocurrency wallets are, the different kinds of cryptocurrency wallets – and why hardware wallets are considered to be safer than other types of cryptocurrency wallets.
What is a cryptocurrency wallet?
Cryptocurrencies, as we know, are digital assets and not physical currencies. Similar to how we store physical currencies in bank accounts, cryptocurrencies are supposed to be stored in cryptocurrency wallets. Every wallet comes with a public address and a private key. The public address is similar to your bank account number, which you provide to people who are supposed to send you money (cryptocurrencies in this case). The private key, however, is like your signature and is unique only to you, and only you should have access to it.
The way the private key is stored changes the security levels. It is also the primary classifier for deciding the kind of wallet it is. Let us take a closer look at the different types of cryptocurrency wallets:
Types of cryptocurrency wallets:
While there are multiple types of wallets, all of them can be classified under ‘hot wallets’ and ‘cold wallets’. Hot wallets are those wallets which require to be connected to the internet at all times and cold wallets are those wallets which can act as a cold storage device and are actual, physical spaces that remain disconnected from the internet. Cold wallets are considered much safer than hot wallets. Here are the various kinds of cryptocurrency wallets:
- Web Wallets
A web wallet, as the name suggests, is basically a cryptocurrency wallet that is based on the web. This is a hot wallet where the private key will either be stored with the wallet service provider or with a third-party service provider who will store the key in a separate server. While these kinds of cryptocurrency wallets are easy to operate and have a simple user interface, users of these web-based wallets are also the easiest victims of hackers.
Web wallets can be targeted by hackers by the means of phishing or by attacking the servers on which the private keys are stored. Phishing involves creating fake login pages of these wallet services, prompting unsuspecting users to enter their passwords, thereby resulting in their account info being stolen. Hence, these are no the most secure forms of cryptocurrency wallets.
- Exchange-Based Wallets
Exchange-based wallets are safer compared to web-based wallets, but are still susceptible to hacking attacks, as has been seen multiple times in the past. These wallets are owned by cryptocurrency exchanges, which allow the users to store and trade their currencies with ease. However, if the cryptocurrency exchange’s server gets hacked, the account data will also get hacked along with it.
Over half a billion dollars have already been lost in the first half of 2018 because of exchange-based wallets being hacked. Exchanges have a big target on the back because of the number of cryptocurrencies that they hold, often fending off multiple hacking attempts on the same day.
- Computer-Based (and Mobile-Based) Wallets
Computer-based as well as Mobile wallets are in a safe spot that lies between hot and cold wallet territories. These wallets involve setting up an application on the computer of the user, and the cryptocurrencies would be stored on the computer, along with the private key. The ownership of the private key rests with the user here and are hence considered safer than the exchange-based and the web-based wallets.
However, computer-based wallets too, can be targeted by hackers by using programs that look for specific kinds of files which store your private key information on the PC. Moreover, if the hard-disk drive goes corrupt, the wallet info might be lost forever. Mobile-based wallets too, act in a similar manner and your cryptocurrencies are stored in mobile in this case. These wallets are slightly safer compared to computer-based wallets.
- Hardware Wallets
Hardware wallets are the safest forms of cryptocurrency wallets as they are basically a physical device that remains disconnected from the internet. Funds can be transferred to and from it while it is connected and after the transfer happens, it can be unplugged from the system and kept in isolation – even locked up in an actual physical locker. The possession of the private key lies in the hands of the user, and so does the ownership of the physical device. Moreover, the fact that it is a cold-wallet, meaning that it remains offline and disconnected all the time – it makes it the hardest for hackers to breach through such protection levels.
What is a hardware wallet?
A hardware wallet is a physical device which can store your cryptocurrency funds. Unlike traditional wallets, it does not need to be online at all times and can be used as and when needed by the user. It is much more secure and unlike the exchange-based wallets or web-wallets, it allows the user to store the private key.
Which is the best hardware wallet?
There are a large number of hardware wallets out there in the markets, but the universally acknowledged top-3 hardware wallets are:
Why are hardware wallets considered safer than regular wallets?
Hardware wallets are considered to be safer than regular cryptocurrency wallets because:
- The ownership of the private key is in the hands of the user
- They remain disconnected from the internet hence making it almost impossible for hackers to attack it.
- It is a physical wallet, meaning that it can be secured and locked up to ensure that the device remains safe.
Are hardware wallets 100% safe?
It would be impractical to call hardware wallets 100 percent safe or fail-proof because there is always the possibility of someone physically stealing the device. However, aside from that, sometimes there might even be a bug in the code of the wallet that hackers can exploit to obfuscate funds in the process of transfer but the odds of that happening are very rare. However, while it cannot be said that hardware wallets are 100% safe, it can be said with surety that these are the safest forms of cryptocurrency wallets that there are at the moment.
Written By: Khushboo Shah