Investing in cryptos? Divide holdings between hot and cold wallets

Keep the cryptos required for trading in the former and the balance in the latter

The adoption of cryptocurrencies by Indian investors is gathering pace. According to a recent survey by consulting firm Kantar, a sixth of urban Indian residents own cryptocurrencies and 19 per cent intend to invest in virtual tokens over the next six months. Experts estimate that more than 15 million Indians have invested in crypto-related assets so far.

However, with cryptocurrencies gaining in value rapidly over the past year, this asset class has become a prime target for hackers and scammers.

Hot and cold wallets

Cryptocurrencies are stored in digital wallets, which can be either web or hardware based, which store them in a device not connected to the internet. Note that the wallet does not store cryptocurrencies per se. It holds the key for carrying out transactions. Two main kinds of wallets are used to store cryptocurrencies and private keys—hot and cold wallets.

Hot wallets are always connected to the internet. Gaurav Dahake, founder and chief executive officer (CEO), Bitbns, says: “Hot wallets make it easier for users to carry out basic transactions, such as receiving and sending tokens.” They are further classified into three categories depending on the platform used—web, mobile, and desktop wallets.

Edul Patel, chief executive officer and co-founder, Mudrex, says: “Since hot wallets are mobile- or web-based they don’t require expensive physical media for storing cryptocurrencies. This makes them cost-effective. On the other hand, since they are always connected to the internet, they carry the risk of being hacked.”

Cold wallets, or hardware wallets, are offline, physical storage devices that have to be plugged into a computer for use. Dahake says, “They are safer since they exist offline. The Bitbns Hardware Cold Wallet that we provide is like a sturdy debit card that can be carried in your pocket.”

Cold wallets have a few shortcomings though. Patel adds, “Using them can be time-consuming. And they require additional hardware, which adds to the user’s costs.”

These wallets can reside on any electronic device—a mobile, a desktop, or a USB device. One can buy hardware wallets like Ledger, Trezor, etc from the market.

Multi-sig wallets

A third type of wallet also exists called multi-sig. Avinash Shekhar, co-CEO, ZebPay, says: “The normal crypto wallets can be compromised. If a person loses access to the seed words, his funds get locked forever. Multi-sig wallets are operated by more than a single private key.”

This wallet is like a bank vault, which requires more than one key to open. They allow users to customise their policies—like two out of three accounts must sign. Shekhar says, “They provide better security than regular wallets. But they limit accessibility if one of the signers is not available.”

Segregate your holdings 

Choosing the right wallet is crucial. Ashish Singhal, co-founder and CEO, CoinSwitch Kuber, says, “Store the bulk of your crypto purchases in cold wallets. Only keep the portion required for trading in hot wallets.”

Cold wallets also encourage investors to hold them for the long term, which enables wealth building. Singhal adds, “It is long-term investments in cryptocurrencies that fetch the best returns and cold wallets enable this.”

The choice of wallet should also depend on your knowledge level. Nischal Shetty, founder and CEO, WazirX, says, “Beginn­ers, who tend to get intimidated by the complexities of cryptos, should choose a desktop or mob­ile wallet that has a simple user interface provided by an exchange.” Traders tend to be better informed. Shetty says, “They are also heavy investors and hence need a highly secure system. Hardware crypto wallets are well suited for them.”

Early adopters of cryptos will be better off adopting a hybrid approach to ensure security.

Practices that can keep your cryptos safe

• Trade via reputed exchanges only
• Use multiple layers of security for your wallet—two-factor authentication, email confirmation, additional question, etc
• Confirm the source before clicking on a link: To capture your credentials, hackers share a link that looks like your wallet platform’s login page
• Many wallets offer a secret key that serves as a digital signature; don’t share the key with anyone
• Check “payee address” and “transaction fee” before submitting the transaction
• Backup crypto wallets regularly and keep software updated to ensure the latest levels of security are in place