Earlier this week, South Korean Cryptocurrency exchange Coinrail got hacked and lost $40m. This is not the first hack in the crypto sphere, and every time, people outside the crypto world claim that ‘cryptocurrency is not safe’ and that this proves them right for not investing. It is therefore important to clarify why these losses have very little to do with the overall safety in cryptocurrency investments.
Where Are the Safety Issues?
So how do people lose their cryptocurrency assets due to hacking and malware? It is because they don’t store their assets in a safe location. Cryptocurrencies are not a tangible asset. They are purely digital. In other words, it only exists as a series of transactions in the blockchain of the issuing company. It can only be accessed through the public and private keys issued to each customer. It is through these keys, and through these keys only, that cryptocurrency can be accumulated or spent. So where can the keys be found?
They originate in the blockchain, and it is essentially impossible to hack a blockchain. Records are widely distributed across thousands of computers. The very architecture of blockchain technology makes hacking impossible. Perhaps someday, through the use of quantum computing, a hack will be possible, but by that time additional safeguards should be in place.
Most of the private and public key vulnerabilities exist in exchanges, and all the major losses of cryptocurrency to date have been due to the hacking of exchanges, not the blockchain. Exchanges are where fiat currency is traded for cryptocurrency, and vice versa, as well as one cryptocurrency traded for another. They are like middlemen in the cryptocurrency marketplace, akin to exchanging dollars for euros at the airport. Unfortunately, exchanges do not use the same distributed blockchain technology that protects assets at their initial source. This is where the major vulnerability lies.
It is therefore problematic to leave cryptocurrency assets in an exchange. This is where the wallet comes in. Anyone playing in the cryptocurrency market will need one. Since cryptocurrency is entirely electronic, the wallet is also digital in nature. It is generally a software program that must be installed locally. It doesn’t hold anything tangible, as opposed to its leather counterpart. Instead, it contains the public and private keys that enable their owner to interact with their cryptocurrency assets. Using the wallet, one can store one’s cryptocurrency assets, send cryptocurrency to merchants or friends, receive cryptocurrency from others, and keep track of current balances.
Every time a person receives cryptocurrency from someone, the ownership of that currency is reassigned by the sender to its new owner, using that person’s public key. The private key stored in the new owner’s wallet is then matched against the public key that was used by the sender. This matching is done automatically and electronically within the blockchain. If the two keys are found to match, then the new owner’s wallet’s balance increases appropriately, while the sender’s wallet’s balance decreases by the same amount.
Issues to Consider
There are some nuances to be aware of. First off, many cryptocurrencies require their own unique wallet. They will not accept transactions based on any other currency. To work with more than one currency, more than one wallet will probably be required. Even when a cryptocurrency can be stored in a variety of wallets, it is generally a good idea to use the wallet that is officially endorsed by that specific cryptocurrency. It’s understandable that for the sake of convenience it might be easier to use a “universal wallet” (one that accepts many types of cryptocurrency), but again, there may be tradeoffs with respect to ease of use and security, and no wallet can currently accept all cryptocurrency types.
There are five major types of wallets: desktop, mobile, online, hardware, and paper. Each has its advantages and disadvantages, so investors should familiarize themselves with each before deciding which type or types will work best for them. It’s also important to consider the distinction between “hot wallets” and “cold wallets”. Hot wallets are wallets that are connected to the Internet, while cold wallets are not connected to the Internet. A wallet that is not connected to the Internet is going to be more secure. Those who frequently use their cryptocurrency will find that a hot wallet is going to be more convenient. However, for those who primarily want to hold on to their assets for the long-term, a cold wallet is probably more appropriate.
The desktop wallet is the most commonly-used wallet type. The wallet software is downloaded directly to the local computer, which then connects directly to the chosen cryptocurrency client. It’s important to understand that this is the only computer that can use that wallet. Therefore, a work computer is less suitable, nor is a public computer, nor one at home that is used by multiple people. While wallets use some of the most secure existing technologies, if that computer gets stolen, hacked or infected, it’s possible to lose the entire contents of the wallet – forever.
The mobile wallet is downloaded as an app on a mobile phone. The obvious advantage to the mobile wallet is mobility. It can be taken anywhere and used anywhere. Mobile wallets are usually simpler and more streamlined than desktop wallets, due to the limited storage space on mobile phones. That may or may not be an advantage, depending on the features that are needed, and the level of user sophistication.
Online wallets live in the cloud, so no software is downloaded to a device. One simply accesses the cloud directly from a browser client. Data on the cloud lives on servers owned and controlled by third parties. Because of this, the decentralisation and democratisation, inherent within the blockchain, are compromised. This makes the contents of one’s wallet somewhat more vulnerable to hacking. However, online wallets do have the advantage of providing access anywhere, from any device.
Hardware wallets generally make use of portable devices such as USB or thumb drives. When the USB drive is inserted into a computer, it provides access to the online client for executing transactions. The wallet’s contents are portable and can be used anywhere, and with any computing device that has a USB port. Because they are then taken offline, they are also significantly more secure than online wallets.
If proper steps are taken to safeguard them, paper wallets are considered to be the most secure of all wallet types, and in some ways the easiest to use. Paper wallets consist of a paper printout of the private and public keys, usually in QR code format. Interestingly, the printout has a certain resemblance to fiat currency, so some may find this reassuring. The printout is generated by a special piece of software that can be easily deleted after the keys have been printed, leaving no trace behind. The printout must, of course, be stored in a highly secure location, as it permits full access to the cryptocurrency assets it references. But it provides 100% control over these keys, without having to depend on hardware, or worry about malware and hackers.
Sadly, there are also malware wallets out there. They masquerade as genuine wallets, and the cryptocurrency assets will be in jeopardy if they are used. For this reason, it is highly recommended that wallets be downloaded only from highly trusted sources.
Lastly, it is important to recognise that if the private key is lost, stolen, or destroyed, the cryptocurrency that it accesses is gone forever and is unrecoverable. This applies to all the types of wallets listed above. It is also true that if a wallet is hacked, it is possible to lose everything, and there will be little recourse. So putting proper security in place, treating the wallet with care and respect, and always operating in “eyes wide open” mode are all essential to a successful experience with cryptocurrency wallets.
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