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Keep Cryptocurrency Safe Knowing This

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One of the hallmark qualities of cryptocurrency is its virtuality. Unlike most other forms of currency, crypto has no physical embodiment. You can’t get it as paper, coin, bar of gold or fancy bead. There’s no token that needs to be locked up in a bank vault or buried beneath a mattress.

But like anything valuable, cryptocurrency needs to be protected. It exists as a natively digital entity that requires an internet connection for any transaction — and that connectedness makes it vulnerable to hacking. In fact, despite its ethereal nature, it’s at least as susceptible to plunder as cash or gold. And with cryptocurrency, these violations are likely to come remotely.

Exchanges’ default wallets are risky

Many newcomers buy cryptocurrency from an exchange, such as Coinbase or BitFlyer, and leave their holdings in those sites’ “custodial” wallets. But like any other online entity, the exchanges are vulnerable to hacking — and as the crossroads for many billions of dollars of transactions every day, they make for particularly attractive targets. The cautionary tales of Mt. Gox, which “lost” 750,000 of its customers’ bitcoins in 2014; NiceHash, which was robbed of $60 million in December 2017; and a recent close call at Binance show the risks associated with leaving your coins in an exchange’s online wallet.

Cold storage vs. hot wallets

Conventional wisdom dictates that if you’ve got more virtual currency than you’d be comfortable carrying around on your person, or you intend to hold it as a long-term investment, you should keep it in “cold storage.” This could be a computer that’s disconnected from the internet or a specialized USB drive called a hardware wallet. (We’ll take a look at how those work in a future explainer.

Dedicating a computer to store your cryptocurrency or shelling out for a hardware wallet isn’t an option for everyone, however. Well known devices such as the Trezor and Ledger cost between $75 and $100 and, by design, add complexity and a few extra steps to every transaction. Software wallets, by contrast, are usually free and easily accessed though, ultimately, less secure.

Three kinds of software wallets

A cryptocurrency wallet’s primary function is to store the public and private keys you need to conduct a transaction on the blockchain. Many also offer features such as integrated currency swapping. There are three main kinds of software wallets — desktop, online and mobile — and each offers a different combination of convenience and security.

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