Since FTX closed its doors leaving hundreds of thousands of investors starving, the idea of “not your keys, not your tokens” has been reinforced. The phrase means that the only way to ensure your tokens are safe is to keep them in a wallet whose recovery phrase is known only to you.
The concept is simple, but to make it work you need to take some specific precautions and rely on the help of a very valuable tool: Cold Wallets. Do you know what that means and how to choose the best one for your needs? Don't worry!
A big fear that beginner investors have when they start venturing into the crypto market is losing their tokens when malicious agents drain their wallets. There is even the idea that cryptocurrencies can be stolen or lost very easily and that, therefore, there is a great risk in investing in them.
But actually, it's the opposite of that. There is no greater sovereignty than the one you have over your tokens when you take the necessary precautions. The only person capable of causing your tokens to get lost is you. That means it has great power, and as Uncle Ben taught us, with it comes great responsibility.
The main way to protect your digital assets is to keep them in a cold wallet, not connected to any device or platform, even though they are considered extremely reliable. That way, there's no way they can get hit by any kind of attack. To understand why this is so, we need to understand how wallets work.
What are digital wallets
When we think of a digital wallet, it is common for us to make an association with the best known names, such as Metamask or Ledger, but, in fact, neither is a wallet in itself. In fact, wallets are, first and foremost, a programming code that allows the custody of crypto assets.
In order for them to be able to digitally store the tokens and guarantee their ownership, they have three basic elements, their essential parts: an address, a public key and a private key. Let's get to know each one of them!
The address
The first part of a digital wallet is an address. It is a coded representation of a particular place on the blockchain. That specific point is marked on a block on the network when you create a wallet. From that moment on, it is associated with the other elements that make up the portfolio and there is no way to change that, as this connection is ensured by the consensus mechanism itself.
The address is derived from the public and private keys that are created while it is and therefore cannot be dissociated from them. There is an intrinsic connection in code that links the three elements in perpetuity.
The public key
Digital wallets use a type of encryption that aims to ensure that the data entered in a given block is protected. For this, it has a model that consists of using two keys. The public key is the first part, used to encrypt the data.
It is the first part of a mathematical equation in which data sent to a given address is scrambled before being recorded in blocks. This creates a kind of cryptographic vault, which prevents the data from being altered, but allows its reading, since this key is public.
The private key
So we have an address on the network, which consists of a specific point in a block, a public key, used to encrypt the information and prevent it from being altered, and the third element, being precisely the key that opens the cryptographic vault.
The private key pairs with the public key and consists of a 256-bit binary code represented by numbers and letters. This is your Seed Phrase. It gives access to all the information that belongs to a given address and makes it possible for tokens to be moved. That's why you must never share it with anyone.
The types of wallets
There are two types of cryptocurrency wallets that are separated according to whether or not they are connected to the internet. Their subcategories offer different features and characteristics that make them more or less secure and also define how they should be used.
Hot wallets
The hot wallets (Hot Wallets) in turn are connected to the internet. They must be those used in your daily life, to connect to platforms and devices and move the tokens you need to make your investments, mint tokens and do other actions.
Cold wallets
Cold wallets are those that are not connected to the internet or insecure device. This type of wallet is the most secure there is, because without the internet it is impossible for them to connect to any network, which prevents the tokens inside it from being moved. It is in such a portfolio that the most valuable assets must be kept.
The portfolio subcategories
Using the three elements that constitute a digital wallet, organizations were able to develop two other types of wallet, which made it easier, more practical and even safer to maintain the custody of digital assets. What defines the type of given wallet is how you use it, but there are subcategories they fall into.
Paper wallet
In the early days of cryptocurrencies, users wrote down their private keys on paper and in secure places and kept them hidden. This was actually the first type of wallet, a paper wallet as it became known. Although this rudimentary method is still used today, some alternatives have emerged over time.
Software wallet
The second subcategory of wallets consists of an application that uses the three basic elements of a wallet in its programming and creates a more practical and friendly interface so that users have a better experience when using them. They are usually a browser extension or application that can be installed on devices. The best known examples are Metamask and TrustWallet.
Metamask was recently involved in a controversy related to the collection of IPs from its users.
Hardware wallet
Finally, the third subcategory of digital wallets is where there is a physical device that directly stores the programming needed to interact with a wallet. This subcategory is considered the most secure by many users, as it does not need to be installed on devices connected to the internet and offers a physical storage location that can be easily transported. The best known are Ledger and Trezor.
How to choose
A crypto investor's journey largely depends on the choices he makes and how he behaves. To know which portfolio best suits your needs, you need to do an analysis of your circumstances, but it is quite likely that you will use several options over time.
But regardless of your investor profile, it's a good idea to consider buying a physical cold wallet. They are a versatile, practical and safe option. Therefore, we are going to make a brief analysis of some options available on the market with the main characteristics of each one of them.
Ledger wallets
Ledger is one of the most well-known manufacturers of physical digital wallets. They currently have two models, the S and the X. The S model is a little more modest and supports a smaller number of networks, but is considered more practical by many users.
Ledger is creating some interesting initiatives on Web3, such as its own marketplace for NFTs. It is a conservative and safe option. Furthermore, it has a robust metal body and supports a reasonably larger number of cryptocurrencies when compared to most competitors.
Trezor wallets
Trezor wallets offer some advantages when compared to Ledger. Starting with the slightly larger and better looking screen. This makes a difference especially for users who handle their wallets frequently. The price of the two brands is similar.
Trezor wallets are made of plastic, which is a disadvantage for some people. On the other hand, it has an application for Android, which makes its use more practical.
SecuX wallets
In terms of security, the SecuX models leave nothing to be desired when compared to the other two manufacturers. Its main advantage is the price.
Each situation calls for a specific portfolio and it is possible to create solutions according to your needs and preferences. Some investors, for example, prefer to use an old smartphone, without a data chip and without an internet connection, to host their cold wallet. Others just purchase a physical wallet like a Ledger model and keep their crypto assets in it.
Entenda os conceitos e se adapte
There are no rules when it comes to choosing the best type of wallet, the important thing is that you understand the basic concepts and act intelligently and conscientiously when moving your tokens, always taking precautions and being careful not to expose your equity to risks.
Have a hot wallet for your daily transactions and keep only the necessary tokens in it for your convenience. That way, if you get scammed in any way, you'll only lose a fraction of your tokens. And keep most of your assets, or at least the most valuable and important part for you, in a cold wallet, and never expose it to any insecure connection.
Trust no one
There is a word that is found recurrently when talking about blockchain: trustless. It means “without trust” and represents a concept that inspired the creation of cryptocurrencies. In that environment, you should not trust anyone. And that includes brokerages and other organizations.
Do your own research (DYOR) and never use a broker as a wallet. If you give someone else custody of your tokens, you are entrusting them with the task of protecting your resources. You don't have to and shouldn't do this. Basic care and minimal knowledge of how a wallet works are enough for you to keep your assets safe without anyone's help.
And it never hurts to remember: NEVER, ever share your private keys!