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Cryptocurrency Safekeeping: What to Know about Wallets

Victoria Walker

Cryptocurrency Safekeeping: What to Know about Wallets
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Cryptocurrency is not simply a hot topic in the legal world. It is also a fast-changing investment market that can lead to enormous profits in a short time, which may appeal to many young lawyers looking to build an investment portfolio. Although stock investments are highly regulated by the US Securities Exchange Commission and have many consumer protections in place, investors frequently worry about the unpredictable, volatile value of digital currencies and the lack of regulations and consumer protections surrounding the cryptocurrency market. For some bold investors, these concerns are not enough to outweigh the interest in investing in cryptocurrencies like Bitcoin. 

Custody and Storage

Many think of Facebook when they think of Cameron and Tyler Winklevoss. The Winklevoss twins are most well-known for suing Facebook’s founder for allegedly using stolen code to develop Facebook. However, within the cryptocurrency community, the Winklevoss twins’ legal dispute with Mark Zuckerberg is largely eclipsed by their successful wager on Bitcoin. The twins are almost viewed as Bitcoin barons because of the size of their Bitcoin holdings, which reportedly top $1 billion. To secure this enormous fortune, the Winklevoss twins have famously deposited different pieces of their private keys in various bank vaults around the country.

One might wonder why they would do a seemingly strange thing. The answer is found in the crypto saying: “Whoever holds the key owns the crypto.” As more people consider cryptocurrency as a potential investment strategy, that crypto adage is essential to remember. People will consider volatility, liquidity, and market capitalization in their assessment, but there are considerations surrounding custody and storage that potential investors should also evaluate.

There are two main components to cryptocurrency custody: the wallet and the keys. The wallet does not contain cryptocurrency in the same way a physical wallet contains money. Instead, a wallet contains the cryptographic codes known as “keys,” which are needed to send and receive cryptocurrency. These keys consist of a lengthy string of alphanumeric characters and exist in pairs. There is a private key used to send cryptocurrency and a corresponding public key used to receive cryptocurrency. Thanks to an increasing number of new products and services, wallets now come in various forms and offer a range of convenience and security features.

Cold Wallets

On one end of the spectrum, there are paper and hardware wallets. These wallet options are commonly referred to as “cold wallets” because they do not store the private and public key pairings on the internet. Paper wallets are generally comprised of a physical printout of the owner’s private and public key pairing. Hardware wallets use storage devices that are similar to USB drives and maintain the security of the keys away from the internet. Because these types of wallets are less prone to cyberattacks, people believe they are more secure. However, they are more prone to physical damage and loss. What cold wallets offer in security, they lack in convenience.

Hot Wallets

On the other end, there are hot wallet options, which are “hot” because they are typically stored either on the internet or on software or an application that is connected to the internet. Hot wallets include desktop wallets, mobile wallets, and web wallets. Desktop and mobile wallets are essentially computer software or mobile applications installed on a user’s computer or mobile device and hold the user’s private and public key pairings. Given these wallets are on devices that are always connected to the internet, they are more susceptible to cyberattacks. However, they are much more readily usable and convenient than cold wallet options. Web wallets store keys on web-based platforms and are accessed via a web browser. While convenient, these web-based platforms are even bigger targets for cyberattacks.

Most cryptocurrency holders use a combination of hot and cold wallets to balance security and convenience needs. Those who have amassed sizable holdings may go a step further and deposit their paper or hardware wallets in a bank vault, like the Winklevoss twins. Regardless of the size, it is crucial to select a wallet service or provider with the same care one would use in choosing a traditional bank. “Whoever holds the key owns the crypto,” but once your keys are lost, so is your crypto.