Cryptocurrency coins are kept in wallets. Wallets are susceptible to be hacked resulting in stolen coins if the correct type of wallet is not used. There are three categories of wallets: cloud wallets, hot wallets, and cold wallets. In this article we will cover what wallets are in general, an overview of each type of wallet, and how to store your coins securely.
What is a wallet?
Cryptocurrencies typically work through a blockchain: a distributed and verified ledger of transactions. Your wallet stores information about the blockchain, a set of identifiers known as public keys, and a private key. When someone sends you an amount of coins of some cryptocurrency they need one of your public keys, also known as addresses. With your public key a sender informs the network that some amount of coins should now be accounted for by you, rather than them. Since you have the private key corresponding to your public keys, you can claim the coins that were sent to one of your public keys / addresses.
You may find that you access your email through an app on your smart phone or through a website on your computer. In both of those scenarios your email exists on an online service and you are simply viewing it on your phone or computer. A cloud wallet is just the same way: it doesn’t exist on your computer, but rather on an online service.
Sometimes applications exist on your computer or smart phone, and access data that is stored on those devices. A hot wallet is one that is stored on a computer which is connected to the internet. The internet connectivity is what makes the wallet “hot”.
In contrast to a hot wallet, a cold wallet is one which is stored on a medium which cannot be accessed through the internet. This is important because internet connectivity can open the doors to attacks where malicious entities try to obtain the coins that you have stored. There are different types of cold wallets, all of which fall under the two categories: electronic cold wallet, and paper cold wallet.
How to store your coins securely
In general, a cold wallet is better than a hot wallet, and a hot wallet is better than a cloud wallet. It is recommended to use a cold wallet whenever possible. Cloud wallet services are often the targets of large-scale malicious attacks because there is so much for an attacker to gain if they are successful. For an end-user like you this could result in a service interruption or a loss of coins, both of which have happened to this author.
Similarly, hot wallets can be impacted by malicious software delivered through the internet. One would need to exercise great levels of care while doing anything on a computer with a hot wallet. An attack could be presented in a variety of ways, some of which are even undetectable.
In a future article we will cover how to get started with a cold wallet to keep your coins as secure as possible!