In order to better understand what a crypto wallet is and how it is secured, I will present a simple analogy.
We can compare it to an archived zip folder in which various documents are stored and compressed. This archive is distributed online similar to how files are available in the Cloud in the case of Google Drive.
Anybody who has access to Drive can find it but the archive requires a password if you wish to unzip it. Only the person who knows the password of the archive can open it to see the documents from wherever they have access to the drive.
Naturally, anybody who has the password of that archive will have access to its content.
In this analogy, the archive is the crypto wallet, the password is the private key, and Google Drive is the blockchain.
Are Crypto Wallets Safe?
There are a few types of crypto wallets – custodial, paper, cold, and hot.
A custodial wallet is seen as the simplest option and most convenient, but it has the disadvantage of leaving your assets in another party’s possession. For example, the assets you are transacting on a CEX such as Binance are stored in a custodial wallet of said platform.
A cold wallet offers the highest level of security but it also requires you to pay between $50 – $100.
A hot wallet is very convenient to use as it is very easy to work with it, since it works as a phone app or in-browser, but it comes with the security risk of storing crypto online.
Now, you may think “Well, this doesn’t sound safe at all! There are no options for me to feel safe!” but it is only because we look at every option objectively.
The wallet you carry with you in which you have money or your credit card comes with more disadvantages than any of these options as you can also lose it or have it stolen in circumstances which are more dangerous than when dealing with a crypto wallet.
So, while every type of wallet has its own drawbacks, they are considered to be generally safe.
Crypto Wallet Safety
When you are creating your crypto wallet, you will receive a seed phrase made out of between 12 and 24 randomly generated words. This seed phrase should never be divulged to anybody unless you want to give those people access to your account.
Never keep the seed phrase in a digital format, like on your phone, laptop, or email. Instead, write it down correctly on about three sheets of paper which you will keep in a safe and secret place, all different from one another.
Just one word wrong and you may never be able to enter that wallet again. It may sound tough but it is a safety measure so that nobody else would ever get into it either.
A private key is generated instantly when you create a crypto wallet and it offers you the ownership of the funds in that wallet from then on.
But losing a private key is the last thing you should do because with it you lose access to the crypto placed in that wallet’s key. Around 20% of all lost Bitcoin is a result of people losing or destroying their private keys.
This is why it is very important to back up your private keys on a computer that is secure and nobody else uses. It is not recommended to store your private key online and even less so if we are talking about one that is not in an encrypted format.