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Article: Ultimate Checklist: Crypto Wallet Security Practical Tips (2024 Updated)

bitcoin and web3 world
blockchain

Ultimate Checklist: Crypto Wallet Security Practical Tips (2024 Updated)

The exponential rise in the adoption of crypto currencies has brought about not only immense opportunities but also a corresponding escalation in crypto-related theft, so ensuring the crypto wallet security has become paramount.

Do your know the spot notice of spotted bitcoin etf approval?

Maybe you should consider more about blockchain wallets security.

In 2023, crypto theft with $1.7 billion stolen, though the number of individual hacking incidents actually grew, from 219 in 2022 to 231 in 2023.

numbers of crypto hacks statistics from chainalysis.com
Image from Chainalysis

These statistics serve as a stark reminder of the need for robust security measures in safeguarding your valuable blockchain assets.


So this guide will highlight the critical importance of crypto wallet security and provides you with essential knowledge to navigate the evolving digital assets landscape.

Crypto Wallets Basic 101

As we explore more details about crypto wallets, this foundational understanding will illuminate the significance of secure wallet selection and effective key management in the journey towards crypto asset protection.

Definition: What is Crypto Wallet?

What is a crypto wallet? And why is the crypto wallet the entrance to the blockchain world?


Blockchain wallet is a tool software that allows people to manage their own blockchain accounts and interact with decentralized applications (DApp).


Specific the concept to daily usage, when you use smart contracts to Ethereum, you need to pay gas ( the handling fees) from your crypto account through the Ethereum wallet.


And when you trade tokens(like the bitcoin) in a decentralized trading network, you not only need the crypto wallet to transfer the tokens to be sold from your own account to receive the tokens to be bought, but also need to use the crypto wallet to transfer tokens to your account and Pay the gas to complete all these operations.


This means that tokens are web3 world money, and since tokens are in your account and can only be accessed through the crypto wallet, so it’s why crypto wallet is the entrance to the blockchain world.

Differences: Tradition Bank VS Web3 Crypto Wallet

Most crypto wallets are very much like banks. They manage accounts owned by you, by other people, or by one or more groups of individuals. And people can create, import and use multiple accounts in one wallet.

 

But unlike traditional banks, crypto wallets and blockchain accounts are not bounded, which means a blockchain account can be used in many crypto wallets. And you can also own as many accounts as you want in one wallet.

 

Also: NO ONE can freeze your blockchain account, cancel your virtual transfer, no consumption limit... and no matter where the other user is in the world, the confirmation time of the transfer has nothing to do with the region.

  • Role in Private Key Management:

Private keys managements lie in the core functions of crypto wallets.

 

These keys are akin to the passwords of traditional bank accounts but with a fundamental difference—provide access to the blockchain where the user's assets are stored. Control of these private keys translates to control of the associated cryptocurrencies.


It means your visit is absolute secure, you won’t leave any print on web3 so that nobody could track you and steal your crypto money.

Description: Why is Crypto Wallet Called Web 3 Gateway?

So that explains (partially) why crypto wallet is called the gate of web3 world? 

It empowers users to secure engage in peer-to-peer transactions, access decentralized applications (D-apps), and participate in various blockchain-based ecosystems.

 

Thus, the security of crypto wallets is paramount, given their role as custodians of digital wealth. How to keep crypto wallet security comes to first.

Types : Popular Crypto Wallets

To catch up changes of web3, crypto wallets keep evolving. 


From custodial to smart contract wallet, you might be messed up: what are they? What’s the difference? Which is the best?

6 Types Based on Different Carriers

  • BRAIN WALLETS

  • PAPER WALLETS

  • MOBILE WALLETS

  • BROWER WALLETS

  • COMPUTER WALLETS

  • HARDWARE WALLETS

So no matter what kind of device you are using or what kind of needs you have, there always is a matching wallet available for you.


Among those crypto wallets, brain wallets have basically been eliminated because the security lever is too low in actual use.

Hardware wallets are used to generate and save private keys offline, and are currently verified as the safest tokens wallets. 

Mobile wallets are mainstream because of its ease of use and large user base.

3 Types Based on Data Storage Methods

  • LIGHT WALLETS

  • FULL-NODE WALLETS

  • HIERARCHICAL WALLETS (HD WALLETS)

Full Nodes Wallet: refers to a wallet that contains all historical transaction data. Mostly used by cryptocurrency miners. Its advantage is safety and reliability. The disadvantage is that all data must be downloaded or updated before it can be used normally. Sometimes it is indeed very slow and will affect the user's use.


Hierarchical Deterministic Wallet (HD Wallet, HD Wallet): Often also called a multi-layer deterministic wallet, it was also called a double-layer deterministic wallet.


Light Wallet: It completes transaction verification through a method called "Simplified Payment Verification" (SPV). The simple payment verification node is the "SPV node", also known as the "lightweight node", and the corresponding wallet is the light wallet. SPV nodes only need to download block header information instead of all transaction information in each block. The resulting blockchain without transaction information is much smaller than the complete blockchain. 


But "Simple payment verification" is only "payment verification" rather than "transaction verification", so the SPV node can verify the existence of a certain transaction, but cannot verify the non-existence of a certain transaction. This flaw can be targeted by denial of service attacks or double attacks on SPV nodes. Exploited by payment attacks. In order to defend against these attacks, SPV nodes often randomly connect to multiple nodes to increase the probability of connecting to at least one reliable node.


Thus, you can see the advantages of light wallets:

Quick to use and only occupy little storage space.


However, for people with network problems, it will be too slow to update data, and it is not 100% safe. 

Therefore, in recent years, its limelight has been stolen by hierarchical wallets.

2 Types Based on Private Keys Contral

  • Custodial Wallets

  • Non-Custodial Wallets

Custodia Wallets: The final decision-making power of the user's crypto assets is in the hands of the third party, not the user.

Usually, centralized exchanges have accounts that are custodial wallets.


The advantage of a custodial wallet lies in its convenience:

If users think that the process of buying and selling cryptocurrencies is complicated, third parties that provide custodial wallets usually set up a platform for users to trade cryptocurrencies, allowing users to directly buy and sell cryptocurrencies.


The shortcomings of custodial wallets are particularly clear:

The custodial third-party escapes, so user's private key and virtual assets at risks.

Besides, third parties usually require users to undergo identity verification (KYC) before registering for a custodial wallet, which may cause privacy leaks.


Non-Custodial Wallets: Users can manage and protect their private keys directly without relying on any intermediaries or third-party services. Simply put, users have complete control over their own private keys and assets.


the disadvantages of non-custodial wallets are the complexity of operations and security risks compared to the convenience of custodial wallets. 

As for security risks, users need to keep their own wallet private keys. Once the private keys are leaked, the assets in the wallet are very likely to be stolen.


But the advantages make up:

1. Complete control: Users have control over your own private keys and assets, avoiding the centralization risks of custodial wallets.

2. Privacy: Users do not need to disclose too much personal information to third parties.

3. Flexibility: Users can interact with a variety of blockchains and decentralized applications (DApps).


You can understand that non-custodial wallets require you to master complete relevant knowledge and be able to avoid all security risks.

2 Types Based on private keys are stored and how they are net-connection

  • Cold Wallets

  • Hot Wallets

Cold Wallets are stored offline, that is, the private keys are stored in an offline device and are not connected to the Internet.


Its main advantage is high security, because the private key is not online, so it is not easily attacked or stolen by hackers. 

Due to offline storage, the use of cold wallets also does not require an Internet connection, which ensures that users’ private information and funds are protected to the greatest extent.


But it is precisely because of offline storage that it is relatively inconvenient to use:

You need to connect the wallet to a computer or other device to operate it. In addition to this, if you lose your cold wallet or its password, you will not be able to access and recover your cryptocurrency assets.

 

Hot Wallets are online storage wallets where the private keys are stored on an internet-connected device, such as a computer, mobile phone or cloud storage.


The main advantage of hot wallets is that they are easy to use:

You can manage and transfer cryptocurrency assets anytime and anywhere.


However, hot wallets also have some disadvantages. 

First, since private keys are stored online, they are vulnerable to hacking and theft.

Secondly, the security of hot wallets relies on the security of the device and network. If there are vulnerabilities in the device or network, the user's cryptocurrency assets will be at risk. 

Finally, since hot wallets usually require an Internet connection to be used, using hot wallets requires more precautions and security measures to ensure the safety of private information and funds.

Other Popular Crypto Wallets

1. Smart Contract Wallets:

Smart contracts are deployed on the chain through EOA accounts. Smart wallets essentially use smart contracts as wallets, which are controlled by code and can implement more complex business logic. It becomes safer for assets to be carried on smart contracts rather than on a certain person's address.


Smart contract wallets have the following advantages:

  • Multi-signatures to improve security and stability
  • Programmable access control
  • Batch processing of transactions
  • Strong scalability
  • Programmable recovery (social recovery)

2. MPC Wallets:

MPC (Multi-Party Computation) wallet uses multi-party computation technology to enhance security and privacy. Multi-party computation (MPC) is a cryptographic technology that allows multiple parties to jointly compute a function without revealing their individual inputs, ensuring data privacy and secure collaboration.


Some benefits of MPC wallet include:

  • Enhanced security: By splitting the private key into multiple shares and never rebuilding it, the MPC wallet reduces the risk of a single point of failure. Even if an attacker obtains one share, they cannot compromise the wallet without obtaining other shares.
  • Improved Privacy: Since parties involved in the MPC process do not reveal their personal input, the privacy of each participant’s share is maintained throughout the process.
  • Resistant to key leakage: In traditional wallet setups, private keys must be reconstructed to sign transactions, increasing the risk of key leakage. In an MPC wallet, the private key is never completely reconstructed, reducing the possibility of key leakage.
  • Collaborative control: MPC wallet enables multiple parties to jointly manage a wallet, promoting collaborative control and decision-making. This feature is particularly useful for organizations or groups that require multiple parties to approve transactions.
  • Key recovery: In some implementations of MPC wallets, key shares can be distributed among trusted parties to enable key recovery if a user loses access to their wallet.


MPC wallet provides a unique way to protect private keys and manage cryptocurrency transactions. However, the security features and implementation details of each MPC wallet must be carefully evaluated to ensure that it meets the needs and requirements of its users.


- Extra Doubts
Is MPC wallet a smart contract wallet?

The concept of multi-party participation in MPC wallet is somewhat similar to that of multi-signature wallet, and although both can realize the multi-signature function, the implementation methods of the two are different.


The MPC wallet decomposes a private key into multiple fragments. The verification process only involves one private key, and the computing network is off-chain and has no connection with the smart contract.


Bonus Tip: if you are lingering MPC wallet and cold storage wallet, and want to make a more wisdom choice, you can read our review: MPC Wallet vs. Cold Storage Wallet,which is better in 2024?

bitcoin etf
Image from Google

Which Crypto Wallet Fit You Best?

So many types of crypto wallets may mess your mind up, so how to choose the best one for yourself?

Here are some tips:

Consider the Following

1. Security vs. Simplicity: 

Balance your preference for enhanced security with the complexity you are comfortable managing.


2. Collaborative vs. Individual Control: 

Decide whether you value decentralized control or collaborative key management.


3. Blockchain Compatibility: 

Ensure the chosen scheme aligns with the blockchain and wallets you intend to use.

How to Get a Crypto Wallet?

Now that you have insight into different wallets, getting a crypto wallet is the next step.

Follow these steps:

  1. Choose a Type

Based on your preferences and security needs, select a wallet type (custodial, non-custodial, hot, cold, etc.).

  1. Research Providers

Explore reputable wallet providers, considering factors such as security features, user reviews, and supported cryptocurrencies.

  1. Download & Install

For software wallets, download and install the wallet application. For hardware wallets, purchase from trusted vendors.

  1. Secure Your Keys

Whether through seed phrases or private keys, ensure they are securely backed up offline.

  1. Test with Small Amounts

Before storing significant assets, test the wallet with small amounts to ensure proper functionality.

Threats and Risks to Crypto Wallets

As the popularity of cryptocurrencies continues to soar, so does the risk of threats and attacks on crypto wallets.


The digital nature of these assets raises a crucial question: Can money be stolen from a crypto wallet? 

The unfortunate reality is YES, IT CAN BE STOLEN.

And the risks for different crypto wallets usually happen in different situations:


  • Mobile Wallets

Mobile wallets provide convenience but are susceptible to unique threats - Phishing Attacks and device vulnerabilities.

Malicious actors may use deceptive emails or fake websites to trick users into revealing their private keys or passwords. And some mobile malware can target weaknesses in the device's security, potentially gaining access to sensitive information stored in wallet apps.

  • Web-based Wallets

Web-based wallets come with belowing risks:

Phishing Attempts: Attackers may create fake websites or use deceptive emails to trick users into entering their wallet credentials.

Exploits and 0-days: Browsers, the platform for web wallets, are common targets for exploits, making users vulnerable to 0-day attacks.

  • Custodial Wallets

Wallets managed by third-party custodians face a broader range of threats:

Security of the Custodian: Users depend on the custodian's security practices, which, if compromised, can lead to the loss of funds.

Phishing Scams: Users may fall victim to phishing scams targeting login credentials, posing a risk to both individual and institutional custodial wallets.

  • Cryptographic Operations

Crypto wallets involve complex cryptographic processes that are not immune to risks:

Design Flaws: Errors in the design and implementation of cryptographic operations may expose vulnerabilities in wallet security.

Implementation Mistakes: Even with established cryptographic practices, mistakes in implementation can compromise the security of wallet operations.

  • DeFi and Decentralized Apps (DApps)

Integration with decentralized applications introduces additional threats:

Communication Risks: Poor authentication and data encryption in the interaction between wallets and DApps can expose users to interception and modification of transaction data.

Malicious DApps: Despite being from a "trusted source," DApps can be compromised or intentionally malicious, leading to fraudulent transactions or unauthorized access.

  • Third-Party Libraries and Dependencies

Incorporating external components can introduce vulnerabilities:

Access to Sensitive Data: If a library or dependency used in a crypto wallet has a vulnerability, it can potentially compromise the entire wallet, including private keys.

Security Patch Delays: Dependencies may not be promptly updated, leaving wallets exposed to known vulnerabilities.

  • Social Engineering Scams

Beyond specific wallet types, users should be aware of social engineering scams:

Impersonation: Attackers may impersonate support teams or official channels to trick users into revealing sensitive information.

Fake Airdrops: Scammers may promote fake airdrops, enticing users to provide private keys in exchange for non-existent rewards.

Checklist: Practices to Keep Crypto Wallet Safe

Understanding threats empowers crypto users to adopt proactive measures, enhancing overall wallet security. Stay vigilant, employ best practices, and be skeptical of unsolicited requests or offers within the crypto space.


And here is a checklist, you can see if your crypto coin wallet is safe:

  1. Protect passwords: Do not share or expose your private key to anyone.
  2. Activate 2FA(Two-Factor Authentication ) on accounts.
  3. Avoid SMS authentication and use app based 2FA.

  1. If using a custodial/non-custodial solution, ensure you have a plan for backup and recovery and that you can reconstitute key shares to move assets unilaterally. Enable 2FA on all accounts, utilize strong passwords, and set up secure policies for all asset movements.

  1. Enable allowlisting on all wallets and accounts.
  2. Utilize a sensitive account only email address (or multiple) for sensitive accounts related to banking, crypto, or similar.
  3. Protect seed/recovery phrase offline and make multiple copies.

  1. Keep your seed phrase to yourself and keep it off devices.
  2. Use a secure hardware wallet and keep it in a safe location.
  3. Keep browsers/devices/OS up to date.

  1. Verify sender email addresses before replying or sharing any information.
  2. Only buy hardware wallets from trusted vendors and directly from the vendor.
  3. When connecting to dApps (or other third-party sites) only leave your wallet connected for the duration that you are using the dApp. - Disconnect once you finished it.

  1. Balance is important. One wallet should not hold all your crypto or NFTs. Hot wallet balances should always remain at an acceptable risk level.
  2. Use burner wallets to connect to familiar sites you aren’t familiar with or for minting/airdrops. You can transfer assets to a safer and more long term storage wallet post collection.
  3. Understand the network/ecosystem you are working with. The risks of crypto wallets can span across blockchains, platforms, and applications. This can also be unique per crypto asset.

  1. Determine what type of wallet you will need for the application you are building. For asset movements that are quick, hot wallets will be best for speed but generally less secure since they are connected to the Internet. If you don’t need to process asset movements immediately, cold storage would be best for security reasons.

What a Good Crypto Wallet Should Be?

If you do find some security vulnerabilities that you can't fix, then maybe it's time to switch to a new crypto currency wallet.


And if you want to choose a safe bitcoin wallet carefully, you must first know some concepts:

Control of funds

It refers to how much control you have over your funds. 

There are generally two situations:

  • Control over Crypto Coins

This should actually be translated as "complete self-control", because you have full control over your own funds. 

There is no third party to help you manage the funds, and no third party can freeze or manipulate it. You are solely responsible for losing your coins, no one can help you if something goes wrong!

  • Shared Control over Crypto Coins

Transactions require authorization from a third party before they can be completed.

For example, a custodial wallet requires that every transaction must be authorized by both you and a third party before it can be completed. 

If you are using crypto wallets like it and want to change to have full control of your funds, you can regain full control using original backups or previously signed transactions that were emailed to you.


So if you don’t understand the meaning and are afraid that a third party will delay things, then you’d better not choose this kind of wallet.

Transaction Verification

when your wallet is involved in a transaction, what mechanism does it use to complete the verification of the transaction:

  • Full Validation

Using all data in the blockchain to verify transactions. Professionally, it is verified through Full Node. 

In this way, your wallet will need to download all the data of the coin blockchain (usually more than 80G). 

If you move to a region where the Internet connection is slow, then it may take several days. 

But because all data is used, the verification is undoubtedly the most secure method of transaction verification.

  • Simplified Validation

Technically speaking, it is a simplified node (SPV Node) verification, which only downloads the Block header information and does not require transaction data for verification. 

It's not as safe as comprehensive verification, but it's faster because there is no need to download data.

  • Decentralized validation

This kind of wallet randomly connects to a server for verification through a list. This means you need to fully trust the third party (the server you connect to) when verifying payments. 

Security is obviously not as good as full verification either, but it is generally faster to use.

  • Centralized Validation

This wallet relies on a centralized management organization and directly uses the data on the organization's server for verification. 

This means you need to fully trust this third party. If a third party provides false data or is hacked and the data is tampered with, etc., it will endanger the security of your funds!

Wallet transparency

Generally refers to the transparency of the wallet code:

  • Complete Transparency

All the code of the wallet has been open source and anyone can see the entire code of the wallet. 

In this way, it will be clear at a glance whether the wallet is fake or not.

  • Basic Transparency

The wallet client, or the part of the code you install on your computer or phone, is open source. 

But after all, this is only the open source part of the client, and part of it is in a black box, which requires you to trust the development team or related companies.

Security of the environment

Computers are vulnerable to malware attacks and their security is very low, while the mobile phone environment is relatively safer, so the computer environment is a fragile environment, while the mobile phone environment is a safe environment.

  • Secure Environment
  • Vulnerable Environment

Privacy

whether your transaction information will be disclosed:

  • Improved Privacy

Greatly increases the difficulty of snooping on your balance and payment history through address rolling (using a new Bitcoin address for each transaction)

The crypto wallet will not be disclosed to others online during transactions Nodes disclose sensitive information.

Besides, allowing the use of the Tor anonymity network to protect against attackers or prevent ISPs from linking your payments to your IP address.

  • Basic Privacy 

It makes it significantly harder to snoop on your balance and payment history through address rolling (a new Bitcoin address is used for each transaction). 

But other nodes may be able to log in to your IP address and tie it to your payments when accepting and issuing payments; or the wallet may not allow you to use Tor to defend against attackers or prevent ISPs from linking your payments to yours. 

  • Weak Privacy

Usually, due to crypto wallets reusing the same address, making it easy for anyone to snoop on your balance and payment history. 

Or because the crypto wallet uses a centrally managed server, it will disclose some information to other nodes (such as recording your IP address when accepting and issuing payments and linking your payments).

Final Thoughts

The crypto space is dynamic, with new technologies and threats emerging regularly. Stay informed about the latest developments and security practices to fortify your defenses against potential risks. Stay Informed, Stay Secure:

Security is an ongoing process. Embrace and adapt to evolving best practices to ensure your crypto wallet remains resilient in the face of emerging threats.

In conclusion, your journey into cryptocurrencies is an exciting and transformative experience. By prioritizing security, staying informed, and engaging with the crypto community, you empower yourself to navigate this landscape with confidence.

 

As the crypto space continues to evolve, so too will the strategies to keep your digital assets secure. Trust in the resilience of the crypto community, and together, we can shape a safer and more secure future for decentralized finance. Safe travels on your crypto journey!

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