On January 19th, Twitter was awash with the news that popular bitcoin critic, Peter Schiff had lost access to his bitcoin wallet due to a decryption error and swiftly blamed his “losses” on the blockchain.
Peter Schiff lamenting the loss of his access to his bitcoin wallet | Image source: Twitter
Apparently, the 56-year old gold bug and CEO of Euro Pacific Capita kept his bitcoin, which he so loathes, on a faulty wallet, and immediately concluded that the tragic loss is undeniable proof that bitcoin is essentially worthless.
“Since all the Bitcoin in my corrupted wallet were gifted to me, it's not that great a tragedy for me that they're lost. "Easy come, easy go," is especially true for #Bitcoin. My plan was to HODL and go down with the ship anyway. The difference is that my ship sank before Bitcoin.” He tweeted.
Naturally, Twitter’s crypto community responded, some offering to help him recover his lost bitcoin, like Anthony Pompliano, Co-founder of Morgan Creek Digital
While others simply used the opportunity to point out that Peter was out of touch with modern technology and simply had no idea how a crypto wallet works.
Or it’s like saying losing access to your gold vault means the entire world’s supply is worthless.
In any case, this turn of events had us scratching our heads. For someone who has taken every opportunity to bash bitcoin whenever it experiences a dip in price, why does he have a bitcoin wallet in the first place? He did mention that the cryptocurrency was gifted to him and that he planned to HODL (Hold On for Dear Life) them, but if he always believed bitcoin to be worthless, why HODL? And more importantly, why complain about losing his bitcoin if it truly meant nothing to him?
For many crypto enthusiasts, Peter Schiff’s tweets on bitcoin are simply for comic relief and this recent rant is just the latest in a long line of antics intended to provide the crypto Twitter community with a belly full of laughs and some pretty interesting meme materials. Nevertheless, one of the most endearing features of the crypto space is that it is open to everyone as long as you understand what you’re getting into.
So for everyone out there who is having a hard time understanding how a crypto wallet operates, here’s a refresher guide, as well as a breakdown of the best practices for your crypto wallet in 2020.
What is a Crypto Wallet?
Image Source: Finder.com
A cryptocurrency wallet is somewhat like a regular wallet. The fundamental difference here is that a crypto wallet is completely digital. If we’re being technical, a crypto wallet is essentially a software that stores both private and public keys and interacts with various blockchains so that users can send and receive digital currencies, monitor their balance and conduct other operations.
What are these keys?
Every crypto wallet has its own unique private and public keys. They are usually a set of random numbers and letters that are mathematically related, such that one works with the other to encrypt and decrypt data.
The private key is used to sign a transaction and prove that you own the related public key for receiving funds. The public key, on the other hand, is used to identify your account on the network. You can think of the public key as the lock and the private key as, well the key, so any funds sent using your public key to encrypt the transaction can only be decrypted using your corresponding private key.
How Does a Crypto Wallet Work?
Owning a crypto wallet is usually the first step to using Bitcoin or any other cryptocurrency. But it’s a common misconception that crypto wallets actually store cryptocurrencies. In reality, digital currencies don’t exist anywhere in any physical form so they can’t actually be stored in any single location. What exists are the records of transactions that are stored on the blockchain.
When a person sends you bitcoins or any other type of cryptocurrency, they’re basically transferring the ownership of the coins to your wallet’s address. Remember that this wallet stores private and public keys, so in order to access these coins and spend them, the private key in your wallet and the public key that the currency is assigned to must match. Once the system records a match, the balance in your crypto wallet will increase based on the amount sent and the balance in the sender’s wallet will decrease accordingly.
Types of Crypto Wallets
There are different types of cryptocurrency wallets out there today that provide different ways to access your digital currencies. The easiest way to classify them is whether they are hot or cold. A hot wallet is connected to the internet, allowing you to access it at any time to transfer or receive funds. Crypto exchanges, cloud wallets, software wallets and most mobile wallets fall under the category of hot wallets.
A cold wallet, on the other hand, is not connected to the internet, which essentially provides it with a new layer of security. You can still receive funds on a cold wallet at any time, but no one can transfer them out. Paper wallets and hardware wallets and similar offline data storage devices fall under the category of cold wallets.
As cryptocurrency continues to enjoy wider global adoption, it’s becoming more important to use both hot and cold wallets. However, this will depend on your approach to owning cryptocurrency. If you’re a frequent day trader, then hot wallets are the ideal choice because of their easy accessibility. If you’d rather HODL your cryptocurrency, then a cold wallet is the recommended way to go.
Best Practices for Your Crypto Wallet
Over 20%. That’s how much bitcoin has been lost or stolen since it was created. This translates to over 5 million coins that will never be returned to circulation. Theft and hacking remain a very real threat so you’ll want to take the right precautions. Plus there’s also the risk of losing your crypto assets by failing to back it up or secure your keys (kinda like our dear old gold punter above). Here’s some things you can do to protect yourself:
Protect your keys always
There’s a common saying among crypto investors, “Not your keys, not your coin,” which simply means if you don’t control the keys of the wallet, you don’t control the cryptocurrency stored in it. This was recently summed by TRON founder and BitTorrent CEO, Justin Sun, in his response to Perter’s tweet.
Store your private keys in a safe location and maybe make backups of it just in case, but make sure you’re the only one who has access.
If you’re using an exchange, take steps to secure your account
There are some who advocate that storing crypto on an exchange may actually be the safer option for most users, like Binance CEO Changpeng Zhao in his response to Peter Schiff’s unfortunate incident.
Still, that doesn’t mean users can’t take extra precautions. In a recent interview with Jordan Steeves, CEO of UK-based cryptocurrency exchange CoinFalcon, he outlined the current security measures undertaken by the exchange, which includes storing 98% of their funds in an offline wallet and providing DDOS protection with a solid 128-bit SSL encryption. However, he was quick to also encourage users to implement best practices for securing their accounts.
“You've probably heard the saying that people themselves are the weakest link when it comes to computer security. So while these security measures already provide a good amount of protection, it is important for our users to take some additional steps on their part to protect their accounts.” He said.
These additional steps include:
- Activating Two-factor Authentication (2FA) for your account
- Choosing a secure password
- Keeping your anti-malware software up to date
- Using only trustworthy apps on your device
- Making sure you’re using the right address of the exchange
Don’t tell people you own crypto
If you must, don’t tell them how much you own. The reasoning behind this is pretty simple -- telling people you own crypto and even going as far as telling them how much you own basically turns you into a target. Think about it; there’s a reason lottery winners are always told to first contact their lawyer before telling anyone else around them of their new fortune.
Use new addresses for transactions where possible
Using the same wallet address for multiple transactions is generally not ideal since anyone can search for the address on a block explorer and see all your transaction history using that address. Essentially, you’re not only showing that person who else you have transacted with, but also how much was transferred. Luckily, you can generate a new address for each new transaction at no additional cost either through your wallet service or by simply opening a new wallet at an exchange or online wallet service.
Alternatively, you could handle your transactions through truly anonymous cryptocurrencies like Monero and Dash.
Keep a back up of everything
Losing access to your crypto wallet can be quite costly so it’s important to create backups regularly. In most cases, it’s as simple as backing up the wallet.dat files on your device or the seed phrases. Your wallet’s seed phrase is a list of random words that store all the information needed to recover your crypto funds. Write down these words in the exact order on a sheet of paper and keep that paper in a safe place. If your computer breaks or for some other reason are unable to access your wallet, you can re-install the wallet and use the seed phrase to get your crypto assets back.
Peter Schiff clarifying that he lost his bitcoin because he never saved his seed phrase | Source: Twitter
Follow the 3-2-1 rule for backups, which states that you should have three copies; two in different media or devices and one off-site. For instance, if you have a hardware wallet, that represents one media. You can then save the second backup on a USB device and the last one on a paper wallet. Next, you’ll want to keep one of these backups away from the other two. Some crypto users even go as far as storing their backups in a safety deposit box at a bank. Remember to also encrypt every backup as an additional security layer.
Double-check everything before sending cryptocurrency
Crypto transactions are basically irreversible so if you send money to the wrong address, those funds are gone forever, except the recipient is benevolent enough to trace your wallet address and refund you. For this reason, you’ll want to always verify that everything is correct. Make this a practice whether you are sending small or large amounts.
The best practices outlined here do require you to put in a little extra effort to secure your crypto wallet and maintain access, but at the end of the day, it’s well worth the effort. CoinFalcon remains committed to providing the simplest ways to buy bitcoin, ethereum, xrp, litecoin and other crypto assets using your credit card or bank transfers. Open your free CoinFalcon account today and get access to safe and secure crypto wallets, and stay up to date on market movements on the go.