Early one Friday morning in late January, users of Coincheck – a Japan-based cryptocurrency exchange – logged in to find their wallets empty of NEM tokens; a cryptocurrency specialised for payments and other financial services.
It was not a temporary server outage, which is a common problem most exchanges have been grappling since the crazy price surge in 2017. Hackers already compromised Coincheck, earlier that day, and the servers were emptied of 500 million NEMs (worth $400 million at the time the incident happened) which is the cryptocurrency equivalent of robbing a bank.
Cryptocurrency exchange – and by extension their users – have been targets to hackers for years. In 2014, following the big heist at Mt. Gox, another Japanese exchange, the price of bitcoin took a deep plunge. Bitstamp, Bitfinex and Etherdelta are the names of just some of the other crypto-exchanges that have been compromised in the years that followed.
Yet there are still so many users that are storing all their cryptocurrencies in exchanges while there are alternatives that can store your digital fortune without compromising your security. Here is what you need to know about different cryptocurrency wallet types and how they can serve your different crypto-needs.
Cryptocurrency exchange: convenient but unsafe
Blockchain, the distributed ledger technology underlying cryptocurrencies, was designed to fend off cyber attacks.
Every cryptocurrency address on the blockchain is tied to a pair of private and public encryption keys. The public key allows other users to send money to that address, while the private key enables the owner of the address to send payments to other addresses. Which means, the holder of the bitcoins, or other digital currencies, do not need to worry about their privacy, as long as they keep their private key, well... private.
Cryptocurrency exchanges store private keys on behalf of their clients. In exchange, it makes it easier for their users to easily trade between fiat or digital currencies. This also burdens these companies with the responsibility of securing all those cryptocurrency accounts and the private keys that go with them.
Desktop wallets: unnecessary and inconvenient alternative
A secure alternative to cryptocurrency exchanges is wallet applications. You can install these applications on your own computer, and the desktop wallets store and manage private keys on your computer, which means you do not need to worry about your secrets sitting in a server located thousands of kilometres away, being surrounded by hordes of crypto-hungry-hackers.
The only thing to keep in mind is that desktop wallets come with their own trade-offs. Many of the desktop wallets require you to download the entire blockchain of the cryptocurrency they provide access to. In the case of bitcoin, the size of the blockchain os over 150GB (which is subjected to change). This limits the user to use their laptop and desktop, which makes them impractical if you want to send crypto payments from your smartphone or tablet.
Desktop wallets can also become compromised if you do not have sound IT and security practices. There are plenty of malware out there that can either steal your security keys or destroy them forever. Which can lead to other unfortunate technical problems, such as having to dispose of your hard drive.
Online wallets: You hit the jackpot!
Online wallets are the sweet spot between the aforementioned wallets, which gives you the perfect balance between convenience and security.
One of the perks is that an online wallet is accessible through browser applications and mobile apps and do not require you to download an entire blockchain to send and receive crypto-payments. Another perk is that online wallets do not store private keys on their servers, making them impervious to data breaches and more secure than online exchanges.
Keep in mind that some of the online wallets do not provide you with the conversion of crypto and fiat currencies, as well as some online wallets do not store private keys on their servers, so stay away from those.
For most users, online wallets are the most convenient option, you’ll have control of your own privacy and security while also being able to easily receive and send cryptocurrencies for different purposes.