Crypto Wallet Open to Hackers? —Here’s How to Protect It!

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“The main point is, no matter how you are backing it up, you need to find some way to back-up your key in case you lose it so that you don’t lose all your crypto from a mistake,” Neuman says.

What’s a Custodial wallet?

With a custodial wallet service, a third party, such as exchanges like Coinbase, Kraken or Gemini, is in control of your private keys.

This means that if you buy cryptocurrency through an exchange, you are given a sort of “IOU” for the cryptocurrency, while the exchange owns the private keys and holds the cryptocurrency in their wallet.

For example, if you buy bitcoin on Coinbase, then “Coinbase owes you bitcoin until you decide to withdraw it,” Neuman says.

Although some in the bitcoin community like to say “not your keys, not your bitcoin,” many prefer a custodial wallet since you don’t need to worry about storing or forgetting your private keys and permanently losing funds.

If you decide to use an exchange, “spend the time to do the research, understand which exchanges have stood the test of time and have some sort of a regulatory framework around it,” says Philip Martin, chief security officer at Coinbase.

You should also understand the potential risks. With a custodial wallet, a hacker wouldn’t need your private keys to move funds from your account, since the exchange owns the keys, not you. That eliminates one wall of protection to your funds, Neuman says.

However, many exchanges invest heavily in security, and there are other ways to protect your account from being hacked individually, such as two-factor authentication.

How to protect your wallet?

Regardless of where you decide to store your cryptocurrency and private keys, be aware of bad actors in the space. Though there are many different scams, a common one is sim swapping.