Table of Contents:
- 1. Before we start, learn more about the private key
- 2. Seed Phrases
- 3. Digital Signature
- 4. Two types of wallets - do you want cold or hot?
- 5. Hot Wallets
- 5. Cold Wallets
- 6. What is the best way to store your funds?
The main idea that stood behind the cryptocurrency market was that it was our own bank - a bank that we could manage. If you find a way to protect them in the safest possible way, we can be sure that they will be much more secure than in the case of any other bank in the world. Sadly, inappropriate actions may result in losing all your crypto faster than you think.
That is why it is very important to learn how to secure your digital coins. This is by far one of the most crucial things before to delve into the world of cryptocurrencies. In this guide, we will provide you with several methods you should learn and then use in order to secure your crypto.
Before we start, learn more about the private key
Just like a real key, the private key unlocks cryptocurrencies, so you can use them. It is simply a very large set of letters and numbers. It is such a gigantic measure, you wouldn't be able to guess it even if you had a billion times to do that. Down below, we present a randomly generated key that is based on a hexadecimal system (it uses numbers from 0 to 9 and letters from a to f - it is limited for the compactivity reasons).
If you were to copy that value, you wouldn’t find it anywhere else. It is all due to its uniqueness. It should be a great example to prove how random these keys can really be. Since the real private keys are even more complex, the possibility of guessing such a key is impossible.
If you ever received some funds, then you are familiar with a public address. Interestingly, it is also a set of random numbers. However, it is not as random as you may think. First of all, this address is a result of cryptographic calculations that are carried out on the private key thanks to which you receive a public key. Later on, it is hashed in order to become the public address.
It is quite easy to generate your public address with the use of your private key. However, if you were to forget or displace your private key, then it will be impossible to generate it with the use of your address alone. That is why you can freely publish your public address on blogs, social media pages, and other websites. It is impossible to take your funds out without having the private key. This is the reason why the private key is the most important thing in terms of cryptocurrency and finding the safest place to store it is as crucial as it can get.
Most people decide to keep their funds on crypto wallets. These wallets offer us private keys. However seldom it happens that cryptocurrency wallets offer only one such a key. In most cases, we will be asked to get Seed Phrases, which will be an additional security precaution for your wallet.
Usually, it is a set of random words that are easily accessible for a human being. A great example of such a Seed Phrase is: horse laptop floor jumping ride nice wheel copper wine expensive guarantee. Thanks to that, we will be able to unlock the access to our wallet with either the private key or with the use of these seed phrases.
This kind of signature is available if we decide to use a private/public key, known as the public key cryptography. It simply proves that the message or action was taken by a specific person. If you make a transaction with the use of cryptocurrencies, you link your private key with a message in order to print a digital signature. It is impossible to determine your private key from the signature. As a result of that, we can safely publish it, just like our public address.
One of great things that concern Digital Signatures is the fact that everyone can compare your public key with that signature in order to verify if you were the sender of a particular message. In this way you prove that you are eligible of spending funds from that wallet.
Two types of wallets - do you want cold or hot?
Cryptocurrency wallets can be divided into many different categories. Two of the most important ones are hot and cold. These two types consist of many different solutions and safety precautions.
Hot wallet is a cryptocurrency wallet that can be connected to the Internet - just like a phone. Hot wallets are well known for their smooth and easy use because we have constant access to the funds. They are very transparent and convenient in use. However, this exceptional comfort is not without a risk.
Because they are connected to the Internet, Hot Wallets are usually less secure than other types of wallets. Even if private keys are not presented to the net in any way, those wallets are frequently the target of hackers and, as a result, sometimes users lose control over the wallet. Obviously, it doesn't mean that they are dangerous. They are simply less secure than cold wallets.
In order to eliminate the possibility of being hacked online, a lot of users decide to keep their private keys outside the net, namely offline. This type of storage is known as cold wallet. In contrast to typical hot wallets, cold wallets are not connected to the Internet. Because of that, the entire process of making transactions is a bit more complicated and the use of cold wallets fairly limits our possibilities. However, they are the greatest in terms of security.
For example, if we want to make a transaction with the use of cold wallets, we have to create a transaction, then sign it, and then transfer it to the blockchain network. The best thing is that we can divide these three steps onto three computers.
Two of them can be connected to the Internet (the one where we create a transaction and the one where we send the transaction into the blockchain network), whereas the middle one, the one where we sign the transaction, is off the grid. It is our backup - a safe zone that cannot be hacked by others and, therefore, our private key will never be stolen.
What is the best way to store your funds?
Every idea presented above has its positives and negatives. If we were to present the best idea without any downsides, this article would definitely end a few paragraphs ago. Sadly, the answer is fully dependent on your own preferences. How big of a risk are you willing to take? Do you need a smooth way to operate your crypto funds or you are better off with the most solid security that is incredibly ineffective in terms of transactions?
If you are constantly trading and you need instant access to your funds, it is a good idea to use hot wallets. However, there is nothing standing in your way to keep smaller amounts of crypto funds on hot wallets and larger funds, the so-called reserve we all have for a rainy day, keep on safer, yet less accessible cold wallets.