As a budding cryptocurrency investor, it’s easy to get caught up in all the crypto excitement.
There’s a lot to do, plenty to learn, and many obstacles to surmount. The impending journey promises to be an unforgettable ride. Nevertheless, the journey is intimidating, and the industry is packed chock-full of information that has to be digested properly to avoid making costly errors.
Every month, there are new and frightening stories of investors losing fortunes to seemingly simple errors. Several minor, but crucial points were ignored, to financial ruin.
There are plenty of lessons to be learned here, a result of severe errors that happened after crypto private keys were misplaced, and oversights that got people forever locked out of their accounts, forever unable to access their funds.
Your choice of a crypto wallet is crucial to your investment, as it’s where you store your tokens after earning them. Even after you buy assets with fiat, you’ll have to hold them somewhere first, from where you can subsequently initiate transactions to complete trades.
In this article, you’ll learn about the four common mistakes that many people make regarding crypto wallets.
However, before proceeding, let’s take a good look at what crypto wallets are all about.
What is a crypto wallet?
It’s impossible to talk about crypto wallets without touching briefly on how blockchain technology works.
Every time you buy cryptocurrency, you aren’t buying any real currency such as that compared to regular fiat denominations like the pound, dollar, and euro.
Rather, you’re indirectly contributing to the furtherance of the computing power keeping a blockchain online and secure.
The more users in a network, the higher the level of security, and the more likely it is for its value to be high. As a valuable asset, its demand will quite naturally be higher than its supply. Its availability or supply reduces, and its scarcity is one of the surest signs of a value increment.
The blockchain is a distributed ledger of “blocks” or records of transactions, including details of when the said transaction was carried out.
So, each bit contains a unique record. And, it is the digital ownership of these records that occur in the form of tokens or cryptocurrencies, that one refers to as asset ownership.
Therefore, while your crypto wallet may hold the literal keys to your funds, the cryptocurrencies themselves are secure, immutable parts of the blockchain, and should be regarded as such.
Investors can choose to store their tokens on cryptocurrency exchange platforms to facilitate easy trading. However, history has shown us that even the biggest names in the industry are not fully secure. This trend is best evidenced in the Binance hack, where hundreds of thousands of dollars worth of tokens were lost.
Although Binance recovered well from this setback, rebounding to reclaim its place as the number one place to buy and trade cryptocurrency, other platforms have suffered such fates, to even worse consequences.
Many have gone completely bankrupt, while others have had to face the ignominy and public distrust of a system proven to be porous and lacking adequate cyber security.
However, that isn’t to say that there’s no solution in sight. It’s obvious, even if many crypto investors continue to make this most basic of errors- not securing their asset holdings.
Crypto wallets are the answer, and they should be adopted fully as they provide a seamless means of transferring tokens as well as securely holding them when not in use.
Cryptocurrency wallets are generally classified into two- cold and hot wallets. These are also alternatively referred to as hard and soft wallets.
While both carry out pretty much the same function, the key difference lies in how they work.
Hot wallets require an internet connection to function. Many of them take the form of web-based applications or mobile software that you have to create an account for, before then creating a secure link to your assets.
Such wallets are convenient, as you can easily launch them and connect them to the respective blockchains whenever you want to make a transaction. However, this convenience ultimately comes with its own perks, some of which are outright disadvantages.
A hot wallet is one that’s hosted online. Even if it works only on your PC or other smart devices, you’re at risk every minute when you’re online and carrying out transactions.
Even if you aren’t online, the fact that it works with internet access means that you’re perpetually at risk. You’re basically signing away your trust to the efficiency of the software’s own cyber security protocols, which is only slightly better than leaving your tokens on an exchange platform.
The reliable alternative is to get a hardware wallet, which is basically a hardware device that stores your crypto key perpetually offline, only going online when you actually need to digitally sign to initiate a transaction.
Let’s see what happens when you make transactions with your crypto wallet
How do crypto wallets work?
Cryptocurrency wallets work similarly to a bank account. They contain your private keys, which are algorithmic hashes that are used to digitally sign a transaction before it’s verified on the blockchain.
For this reason, you can use a simple paper wallet for the purpose, the same way you’d use a soft wallet or a Trezor device.
Because what’s in storage, what has to be kept so securely, is not your actual cryptocurrency tokens, but the access password to them, which is what your private keys are.
The public keys are addressed to a wallet and perform the same function as your bank account number. That is, anyone who wants to send you crypto will require your public address to identify your account and initiate a transaction.
A crypto wallet will ideally have multiple addresses for each token type. That is to say that if you send Bitcoins into an Ethereum wallet by accident, the tokens are lost forever.
This is why it’s so important for you to have a secure wallet, one that is impervious to hacks and compromise.
There are many ways to lose money when using crypto wallets. And it’s not just about using the wrong software. It’s also about personal carelessness.
Without further ado, let’s jump into 4 of the most common mistakes that people make regarding crypto wallets:
Crypto wallets hold actual cryptocurrency
This is a wrongly held view and is a distortion of the concept of the blockchain.
The blockchain itself is a network of publicly distributed records kept functioning securely by a self-verifying algorithm. A separate portion of the network contributes the required computing power to scale such a vast financial network.
As a result, it is impossible for regular PC software to hold even a portion of the computing power, represented in the unique blockchain-exclusive cryptocurrency tokens.
The tokens reside solely on the blockchain, and your crypto wallet performs a completely different function.
Carelessness with digital keys
Your crypto keys, particularly the private keys, are a result of high-grade computerized encryption.
They’re the password to your assets, and many investors make the unfortunate error of handling their private keys poorly.
And the records show this! Today, nearly 4 million Bitcoins have been rendered completely inaccessible. Programmers have lost keys, while others have disposed of hardware wallets unwittingly, to financial loss.
If you have physical copies of your keys, you would do well to keep them as safe and secret as possible.
Inputting transactions in error
The blockchain is notorious and popular for being immutable, and all transactions are as such.
Many people make the error of not checking all the data entries before initiating a transaction. Information like the token type, wallet address, transaction fees, and the like should be triple-checked if necessary.
That extra “zero” might just mean an indvertentent financial loss for you.
Over-reliance on soft storage
While a software wallet is highly convenient and interoperable with several trading platforms, it’s not always the best option.
Many exchange platforms host your tokens online in custodial wallets, but some of the best ones have additional holdings in cold storage facilities and physical databases in the real world.
It’s a great practice, and you would do well to also invest in a hardware wallet.
Poor knowledge of blockchain and cyber security
If you’re going to be putting your money into a venture, then it’s only reasonable that you endeavor to know as much about it as you can, to help you to avoid amateurish errors.
Crypto scams are real, and you could unwittingly divulge the secrets of your crypto wallet to a malicious element if you have poor knowledge of how cyber security works.
No one’s saying you need a cybersecurity degree. But, you should try to know the basics like phishing, brute force attack, distributed denial of service (DDOS) attacks, and so on.
You can also check out blockchain platforms like CoinStats to get relevant information and choice insight on tokens, exchanges, and crypto market trends.
Given that a cryptocurrency wallet offers so many functions and has several integrations, it can be difficult to find the balance between much-needed transaction convenience and security.
That’s why you need to be on your guard every time, taking extra care to ensure that your token is safe and secure at all times.
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