Mastering Crypto Wallet Security: Advanced Strategies for Hot, Cold and warm wallets
Come along with us as we explore some exceptional and advanced security options for all types of wallets, with a special focus on cold wallets.
TYPES OF CRYPTO WALLETS:
In the world of cryptocurrency, the safety and security of your digital assets are of paramount importance. Understanding the different types of wallets is essential to protect your crypto from hackers and other potential threats. In this discussion, we'll explore the three main types of wallets - hot, cold, and omnibus (warm) - and the security measures you can implement for each. You'll better understand how to keep your crypto safe and secure, no matter which type of wallet you choose, and explore some unique security solutions for cold wallets. The cold wallet security section at the end is where it gets really interesting!
HOT WALLETS:
Hot wallets are digital wallets connected to the internet, and they are popular among cryptocurrency users due to their convenience and accessibility. These include mobile or desktop wallets, browser extensions, or web-based wallets. One of the most popular hot wallets is Metamask, which is widely used for accessing decentralized applications (dApps) and interacting with various blockchain networks.
Hot wallets are designed for short-term storage of small amounts of cryptocurrency, and they are useful when users need to access their funds quickly while on the go. They are also optimized for interacting with DeFi protocols, NFT marketplaces, and other blockchain-based applications, making them a versatile option.
However, there is a significant downside to using hot wallets: they are more vulnerable to hacking attacks than cold wallets. The security of a hot wallet depends on the security of the device it is installed on, the strength of the password, and the security practices of the user and third parties the user interacts with. Following are some security measures for hot wallet users.
HOT WALLET SECURITY TIPS
Use a strong and unique password to access your hot wallet. Please avoid using the same password for multiple accounts and make sure it is at least 12 characters long, including numbers, letters, and symbols.
Enable two-factor authentication (2FA) on your hot wallet to prevent unauthorized access.
Use an Authenticator app; SMS-based 2FA can be susceptible to SIM swapping attacks.
Make sure your hot wallet is running the latest version of the software. Keeping software up to date ensures that any security vulnerabilities are patched, and your wallet remains secure.
Use a respected and trusted wallet provider to reduce the risk of being scammed or hacked. Do your research, and make sure they don’t have any known security issues.
Consider using a hardware wallet in conjunction with your hot wallet. Dividing assets allows you to keep most of your funds in cold storage and only transfer what you need for day-to-day use to your hot wallet.
Keep your private key safe and secure, and never share it with anyone. Store it in a safe place, such as a hardware wallet or a password manager.
Be cautious when using public Wi-Fi networks, as they can be vulnerable to hackers. Avoid logging into your hot wallet or conducting sensitive transactions on public Wi-Fi.
Regularly back up your wallet and store it safely so you can still access your funds even if your device is lost, stolen, or damaged.
Consider using a Virtual Private Network (VPN) when accessing your wallet to encrypt your traffic and protect against hackers, especially on a public network.
WARM WALLETS:
An omnibus wallet is a Luke warm wallet, something between hot and cold. Omnibus wallets are owned and managed by a third party, such as the Coinbase, Trust, and Phantom wallets. The custodians hold it on your behalf until you move it to one of your personal wallets. Funds stored in a custodial wallet could become inaccessible if there is trouble with the institution, and your money could be seized and used in bankruptcy proceedings to pay off debtors. Counterparty risk and regulation are significant problems with centralization. Especially when they decide to delist tokens, “not your keys, not your crypto” as the saying goes. Here are some measures you can take to secure omnibus wallets.
WARM WALLET SECURITY TIPS:
Always choose a well-known and reputable wallet provider. Do your research, read reviews, and check if the provider has any history of security breaches.
Enable two-factor authentication (2FA). 2FA adds an extra layer of security to your wallet by requiring a code or password in addition to your regular login credentials.
Use an Authenticator app; SMS-based 2FA can be susceptible to SIM swapping attacks. An authenticator app generates codes locally on your device, meaning you can still use it even if you don't have an internet connection.
Always keep your wallet software up-to-date to ensure it has the latest security patches and features.
Use a strong and unique password, your wallet password should be long, complex, and unique to prevent anyone from guessing it.
Consider using a Virtual Private Network (VPN) when accessing your wallet to encrypt your traffic and protect against hackers.
Be wary of phishing emails or websites that trick you into giving away your login credentials or private keys. Always double-check the URL of the website you are visiting.
COLD WALLETS:
The safest way to store significant amounts of cryptocurrency is through cold wallets such as Ledger or Trezor. These wallets are not connected to the internet and require a password to access them. You can transfer your funds to a new device using a 16-word seed phrase if they are lost or stolen. Keeping this seed phrase confidential and secure is essential, as anyone with it can access and control your assets.
The adage "not your keys, not your coins" highlights the importance of controlling your private keys (seed phrase) for the wallet where your funds are stored. When setting up your wallet, the device will provide you with a multiple word seed phrase, which you should write down and keep safe. This seed phrase is not a password you create but is generated by the cold wallet itself and must be used in the correct order. Cold wallets offer an additional layer of security, as they are not susceptible to online attacks or malware that could compromise the wallet's private keys.
The multi-word seed phrase is only ever on the device itself, and it's one of its core functions to ensure that these words are never exposed to your computer. Even Ledger Live cannot see them. However, it is the most secure and hack-proof way to store crypto assets. If you lose your passphrase, there is no recourse to access your funds; you are your own bank, which comes with much responsibility.
COLD WALLET SECURITY TIPS
Only buy a hardware wallet directly from the company. Thieves can sometimes set up the wallet, copy your recovery phrase, box it back up, and send it to you. Once you transfer funds to it, they can quickly take control of your assets and transfer them to their wallet.
Use a strong PIN number.
Use 2FA (two-factor authentication) and an Authenticator app.
Write your seed phrase on the paper provided with the wallet and keep it somewhere safe and ideally separate from the device.
Always have your recovery phrase on hand, especially when performing firmware updates.
Consider using a physical security key, such as a YubiKey, to authenticate your access to your wallet. Physical keys can prevent hackers from accessing your passphrase even if they have your login credentials.
Use a time-delayed passphrase: Some wallets allow you to set a time delay before you can access your funds. Delayed response can prevent hackers from accessing your funds immediately after stealing your passphrase.
Some cold wallets offer biometric authentication, such as fingerprint or facial recognition. Biometrics adds an extra layer of security and prevents hackers from gaining access to your wallet.
Write the words in a secret code or reverse order to confuse prying eyes.
Engrave the seed phrase on metal to protect it from fire, flooding, and decay.
A split-key solution involves splitting your passphrase or private key into multiple pieces and storing them separately. For example, you could keep one part in a bank vault, another in a safety deposit box, and another with a trusted family member. This makes it extremely difficult for hackers to access your passphrase or private keys.
Divide the seed phrase into parts and distribute them to a few highly trustworthy people; if they access all parts of the secret key, they all own and access your funds.
Keep an extra, unopened cold wallet on hand if you lose your current one; shipping times directly from the company can take weeks.
Give the complete seed phrase to a few trustworthy people, but with 2-3 words missing from each copy. Each person should have a different set of missing words so that even if someone tries to access your wallet, they can only do so with all the missing words.
Consider using a decoy wallet with a small amount of funds to mislead hackers. Decoys can be used to throw off hackers if they gain access to your passphrase or private keys.
Consider using a decoy seed phrase and keeping it with your cold wallet, so thieves assume they have your secret keys and won't search for the real one hidden somewhere safe.
Steganography is the practice of hiding information within an image or other digital file. You could use steganography to hide your passphrase within a seemingly innocuous image, making it harder for hackers to find.
A brain wallet is a passphrase that is memorized by the user and not written down anywhere. Memorization can be a more secure option as there is no physical record of the passphrase for a hacker to find, but it also requires strong memorization skills.
A book cipher is a technique that uses a book or other written text to encode a message. There are many ways to encode your passphrase, but you must remember your chosen method.
You could use a holographic or biometric security seal to protect your wallet and prevent tampering by "trusted" but sneaky hackers and thieves.
Some of these techniques can be quite complex and may not be practical for everyone. It is essential to carefully consider the level of security appropriate for your specific situation and seek expert advice if necessary. I hope this article has revealed some new security measures, even if they are a bit unusual and complex. I also hope it helps our friends in the crypto community stay safe!