Thefts from cryptocurrency wallets are on the rise.
Earlier this month, theft from Solana Wallets has been in the millions of dollars where it is believed that funds from over 8,000 Solana wallets have been completely drained.
Also, almost monthly we hear news about Metamask hacks where users have lost their valuable NFTs — stolen from their wallets.
Increasingly, the cryptocurrency community is asking…
Are cryptocurrency wallets safe?
The answer is….it depends.
There are many different types of Cryptocurrency Wallets
Not all crypto wallets are created equal and the safety and security of the wallet depend to a large extent on the type and function of the wallet.
To answer this question of whether cryptocurrency wallets are safe, we need to delve into the different types of cryptocurrency wallets.
Generally, cryptocurrency wallets can be categorized into 3 categories:
- Centralized Wallets
- Software Wallets
- Hardware (Cold Storage) Wallets
While all cryptocurrency wallets are designed to be safe and secure, each one of these categories of wallets has different security risks that every user should be aware of.
The most common wallets available are centralized wallets. As a user, you will likely encounter these wallets on 3rd party exchanges where cryptocurrencies can be bought and sold.
These are considered ‘centralized’ wallets because the exchange has full control over all the wallets it hosts and also controls the wallet keys.
As you have likely heard before, not your keys, not your coins. If you don’t have sole custody of the wallet keys, then you don’t have sole access to the coins in the wallet.
With centralized wallets where you don’t have sole custody of the keys, the exchange has the ability to block or otherwise control the movement of funds of these accounts.
While these wallets are considered secure, you don’t have the keys, you don’t control the coins. For example, we saw this earlier in the year when Coinbase blocked the transactions of over 25,000 Russian-linked crypto addresses.
One of the most popular types of wallets is software wallets and likely the most popular cryptocurrency software wallet is MetaMask.
Software wallets are fully supported by software and as the user, you have custody of the seed phrase and password. While these types of wallets are generally considered to be secure, they do come with security risks.
The biggest security risk is when these types of wallets are connected to third-party sites which may contain harmful code, allowing a bad actor to initiate a transaction without the user's direct consent.
While wallets like MetaMask are implementing better security and authority controls, as a user you need to be aware of what permissions you grant to third-party websites.
The biggest drawback to software wallets is that they are almost always connected to the internet.
For the best protection, users should be using a Hardware Wallet.
Hardware (Cold Storage) Wallets
Hardware wallets, as the name suggests incorporate an additional hardware security feature. These wallets are often also referred to as Cold Wallets as they are not directly connected to the internet.
Hardware wallets are only connected to the internet when needed and give the user the ability to use a PIN and or passphrase to easily and safely make transactions while keeping the key safe and encrypted on the device.
The use of hardware wallets is considered by the cryptocurrency community as the best and safest type of wallet to use for cryptocurrency transactions.
Hardware wallets can also be connected to 3rd party software wallets offering a higher level of transaction safety.
If you own any significant amount of cryptocurrency, it’s highly recommended to use a hardware wallet.
The two most common hardware wallets on the market are Trezor and Ledger.
What are the Best Cryptocurrency Wallets?
The best and safest cryptocurrency wallets are generally considered to be Hardware (Cold Storage) wallets.
Hardware wallets aren’t very expensive and should only be purchased directly from the manufacturer.
For a list of the best hardware wallets in 2022, check out the article below:
As a cryptocurrency enthusiast or investor, ensuring the safekeeping and custody of your funds is of paramount importance. Whether you are just starting out or have been in the cryptocurrency space for a while, it's imperative you understand the advantages and disadvantages of the different types of cryptocurrency wallets. A hardware wallet is an important and necessary component of any cryptocurrency investor's safe custody of their assets.