Why it’s important to choose a secure crypto wallet?
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How do I know how secure is my wallet?
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Are there any other risks I should take account for?
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Wrapping up: Crypto is a great wallet for you
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Are you searching for the best crypto wallet to keep your digital currency safe? Many exchanges and mobile wallets help you store your cryptocurrencies. But are they secure?
If you have a lot of digital assets, you may choose to keep them in an exchange's custodial wallet. Doing so might not sound like a big deal, especially if you use a well-regarded exchange. However, keeping your funds in an exchange’s wallet is usually not the best idea.
Not all crypto exchanges and wallets provide the best security for your digital assets. Hackers are constantly designing new viruses to steal crypto from wallets, and cyberattacks against exchanges are becoming more frequent. So, which is the best crypto wallet type to keep your funds safe from these threats?
The importance of private keys
Before delving into the best crypto wallet type, let’s briefly discuss private keys and how they relate to your mobile wallet. A private key is a unique code that grants access to a wallet. Whoever has the private key to a given wallet can transfer or withdraw funds from it. As such, properly securing your wallet’s private key is extremely important for making sure that the funds in that wallet are safe.
Custodial vs self-custodial wallets
When choosing between storing your cryptocurrency on an exchange or in your own wallet, you’re really making a choice between two types of wallets that manage private keys differently. Custodial wallets are those where an exchange ‘keeps custody’ of your private key and, therefore, your digital assets. Think of it as a bank that stores your money in the real world. You don’t own the bank, but it manages your assets on your behalf.
Alternatively, you could choose to put your assets in a self-custodial (often referred to as a non-custodial) wallet, which is one that you manage and control yourself. In the case of a self-custodial wallet, you maintain an exclusive private key that allows you to access your wallet. In a custodial wallet, this key is held by the exchange that manages your wallet. Self-custodial wallets are usually the best crypto wallet type because they allow you to exercise full control of your digital asset storage and are not tied to any single exchange or other institution.
Custodial wallet security explained
The problem with most custodial wallets on the market is that they are less secure than self-custodial wallets. Entrusting the management of your wallet to a third party can be convenient, but it also makes your assets a target for hackers. If the exchange you use is successfully hacked, your private key and funds could be stolen. It’s important to note that exchanges are simpler to hack than the highly secure blockchain networks that power cryptocurrencies. As a result, a custodial wallet is usually not the best crypto wallet solution from a security perspective.
Exchange security explained
As you can see, the security of an exchange is tightly linked to how secure funds stored in its wallets will be. But not all exchanges have the security problems associated with custodial wallets. To understand this, let’s look at the two major types of cryptocurrency exchanges:
Centralized exchanges (CEX): Most crypto exchanges are centralized or custodial, meaning the exchange controls your keys and digital currency.
Decentralized exchanges (DEX) are self-custodial, meaning the exchange lets you control your keys and digital currency.
Centralized exchanges comply with the appropriate regulatory authorities in their jurisdiction and need licenses to operate. Decentralized exchanges, on the other hand, don’t rely on any centralized bank or authority.
Both centralized and decentralized exchanges can leave you vulnerable to cybercrime. Some exchanges offer two-factor authentication (2FA) which requires two methods to verify your identity. It’s always good to choose an exchange that offers this security feature, as it adds an extra layer of protection against fraud.
If an exchange doesn't secure your account and mobile wallet with 2FA, you might want to look elsewhere. Also, be wary of exchanges that authenticate your identity via SMS. A recent digital currency hacking trend is counterfeiting phone numbers, rendering SMS authentication useless. So, exchange-managed custodial wallets are not always the best crypto wallets for storing your virtual currency.
Self-custodial wallet security explained
Now that we’ve had a look at the custodial option, let’s see why self-custodial storage is usually the best crypto wallet solution in terms of security. A self-custodial wallet has no third-party entity for hackers to target. You alone control your private key and manage your wallet. As long as your key remains safe, there’s relatively little risk of your funds being stolen.
The trade-off is that you are solely responsible for managing and remembering your private key. If you lose your key, you could be locked out of your wallet and lose access to your funds. These days, many wallets offer recovery phrase backup. A recovery phrase is a set of random words required to regain access to a wallet. Like the key itself, though, you need to keep track of your recovery phrase in order for it to do you any good.
So, what's the deal with cold wallets?
If you’ve read up on different types of crypto storage, you may have heard about cold wallets and the added security they provide. A cold wallet is one that's disconnected from the internet. In many cases, it’s a hardware wallet on a specialized USB. It’s generally harder to steal funds from a cold hardware wallet because a cybercriminal requires physical possession of your hardware device and your device's password.
Cold wallets are also used by many exchanges to provide an extra layer of security around customer funds. If you choose to use a custodial wallet, selecting an exchange that keeps most of its funds in cold storage could be a more secure exchange-owned wallet option.
Although cold wallets might be the best crypto wallet choice for safety, they aren't as convenient as a web-based or mobile wallet. They can also cost a few hundred dollars for the specialized hardware needed to store crypto offline, which might not make financial sense if you don't deal with a lot of digital assets.
Pros and cons of wallet and exchange storage
As you can see, there are advantages and disadvantages to both methods of storing digital assets. Storing your funds in an exchange’s custodial wallet makes it simple and convenient to begin working with cryptocurrency. But, your funds will always ultimately be controlled by that exchange. If the exchange is hacked, your funds could be exposed and stolen. Having your wallet controlled by an exchange also increases risks related to censorship and government regulation.
A self-custodial wallet addresses most of these problems by putting you in full control of your funds. Self-custodial wallets are more secure and less subject to the whims of exchanges or government regulators. These wallets, however, do put the responsibility for storing private keys on you. If you lose your private key, you could lose your funds permanently. While there are backup solutions, there’s always at least a chance you’ll forget your key and recovery phrase and be unable to access your wallet.
Final word: what's the best crypto wallet?
When it comes to selecting the best crypto wallet, security is a prime consideration. Most exchanges are custodial, meaning you don't own your private key or other data. So, if you keep crypto on an exchange’s custodial mobile wallet, hackers might infiltrate your funds and even steal your financial information.
While cold storage will solve this problem, these wallets are inconvenient and expensive to set up. Using a self-custodial mobile wallet such as RockWallet gives you control over your information and adds an extra layer of security.
