One thing we know for certain about investing in cryptocurrencies: the market is volatile. The crypto crash of June 2022 drove that point home when the price of bitcoin sunk below $20,000, after peaking at $68,000 a year before. Millionaires come and go. And lately, crypto is often the reason.
The cryptocurrency industry is also fraught with scammers. According to the Federal Trade Commission, some 46,000 people have reported losing over $1 billion to crypto scams in the past year. All in all, it’s fair to say that investing in crypto is a risky business. If you’re thinking of entering the market, it makes sense to protect yourself at every step of the journey. Let’s talk about what that looks like, including protecting yourself against scammers, choosing the best crypto exchange, and safe storage of your crypto holdings in one or more crypto wallets.
How to Avoid Crypto Scams
The old adage holds true when it comes to cryptocurrency investing: if it sounds too good to be true, it isn’t. Many crypto scammers try to tempt potential victims with outrageous claims of fast money. But those aren’t the ones you’re likely to fall for. Other scams are much more subtle.
Some are based on tried-and-true scam models like phishing. Standard rules apply when you receive an unsolicited email about crypto that asks you to click on a link. Don’t click and don’t provide any personal information in response.
When trading cryptocurrency, be sure to stick to well-known cryptocurrency exchanges to transact business. Fake crypto exchanges are common nowadays. It’s not always easy to tell whether a crypto exchange is legit, but you can perform due diligence by researching it in the financial press and seeing whether it’s rated on Google. And testing out the exchange’s customer support services yourself. Send the exchange an email. Place a call. If an exchange doesn’t provide a customer support phone number, it’s already suspect in our minds.
You can also consult the Better Business Bureau to see if an exchange is rated before you use its services. Many exchanges are, even though they don’t generally get high marks. But if they are mentioned on the BBB website, you can at least be assured that they have had real customers. Checking LinkedIn isn’t a bad idea either. Overall, the crypto exchange you choose should have a significant presence on social media. It shouldn’t operate in the shadows.
Convenient as they may be, you should always be wary of using public wi-fi networks. That’s especially true when conducting financial business online. Don’t even check your bank balance, let alone trade crypto using a public network. Scammers may be to intercept the information you send across the network at, say, your local Starbucks. Never buy, trade, or even log into your cryptocurrency accounts from a public network. You can still do crypto business in public places, though. The solution is to equip your laptop or tablet with a Virtual Private Network (VPN) and not log onto the networks supplied by your favorite haunts.
Dating websites have long been a haven for scammers of all kinds and, sadly, crypto scammers have infiltrated that realm of the internet, too. It’s common sense not to mingle your finances with a stranger’s, but you’d be surprised how many men and women do. Love can be blinding. So keep your safety glasses on.
You’ve Invested in Crypto. Now What?
Once you’ve purchased crypto from an exchange, your next concern will be where to store your crypto assets. If you’ve only invested a small amount of cash, you may simply allow your exchange to hold your digital coins. The exchange will issue you a crypto wallet that allows you to move your crypto around and otherwise manage your assets.
But crypto exchanges are vulnerable to hacking. That’s because they use a centralized system of storing data. User information resides in a single database that is owned by the exchange. Once you get into serious dollars, it’s wise to use your own crypto wallet, where your data is stored on a blockchain.
Choosing a Crypto Wallet
There are two basic types of crypto wallets. Hard wallets (also known as cold wallets) are physical devices that are not inherently connected to the internet. Soft wallets (also known as hot wallets) are, by definition, purely digital and live on the internet. Both types serve the same basic function: they store your private crypto keys. Each type of wallet offers its own advantages and each has its drawbacks. Let’s compare hard and soft wallets side by side, so you can decide which would better serve your crypto “lifestyle.”
A Look at Hard Wallets
Hard wallets are small pieces of electronic equipment. They’re smaller than a deck of cards. You can purchase a hard wallet online for under $100. Hard wallets are best stored in a secure location at home when not in use. They are normally not connected to the internet: you only get online with it when you need to transact crypto business. The device must be physically plugged into a connected device like your laptop or tablet.
For that reason, hard wallets are less convenient to use than soft wallets. But because your private keys are not stored online, hard wallets are considered by most experts to be more secure. It’s easier to keep a hard wallet beyond the reach of crypto criminals. They’re largely immune from hacking even if they are lost or stolen. They’re not vulnerable to large-scale data breaches. And they’re impenetrable to malware.
There is another drawback to using hard wallets worth mentioning. It’s incumbent on the user to keep a record of his or her private keys outside the wallet itself, such as on a piece of paper. Don’t keep that record anywhere near your hard wallet and don’t keep it on your cell phone, either.
A Look at Soft Wallets
Soft wallets hold your private keys, too. You can’t hold a soft wallet in your hand but you can reach it through any internet-connected device you have on hand, without the need for additional hardware. Here’s an easy way to remember the difference between hard wallets and soft wallets: hard wallets are pieces of hardware and soft wallets are made of software. While you typically have to pay for a hard wallet, many soft wallets are available for free. They’re often issued by crypto exchanges when you start trading crypto, but many stand-alone free wallets are also available.
The main advantage of a soft wallet is that you can access it from anywhere you have an internet connection. It doesn’t matter whether you’re spending a night at the opera or recovering from surgery in the hospital. You can buy, sell, trade, or spend your crypto any time you wish. Since the crypto market is volatile and sometimes making money with your crypto assets depends on executing trades from moment to moment, soft wallets are tailor-made for active traders. Soft wallets make spending your crypto easy, too, at the growing number of establishments that accept crypto payments. Amazon, Burger King, Home Depot, and Shopify are among them. So any time you get a craving for French fries or need to buy a load of sheetrock by drawing on your crypto holdings, you can do so quickly and seamlessly. Practically speaking, soft wallets turn crypto into cash. You can use one just as easily as a debit card at many online and brick-and-mortar stores.
The safest way to use your soft wallet is through a private, secure connection. That’s another argument for investing in a VPN. It isn’t a good idea to use your soft wallet on a public wi-fi network for the reasons we’ve described earlier.
If all that sounds great to you, remember there’s one catch. No information stored on the internet is 100% secure. Witness the number of large-scale data breaches registered each year and the increasing frequency of identity theft. While they are more convenient, soft wallets don’t insulate you from crypto crooks as well as hard wallets do. That’s why, if you’re holding a great deal of cryptocurrency, many experts recommend a multi-pronged approach to crypto storage.
Diversification May Be the Safest Solution
Just as you hold cash in several different bank accounts and don’t invest all of your money in one stock, it’s a good idea, with crypto wallets, to spread the joy around.
If you own a lot of different coins, you may be forced to carry several soft wallets. That’s because not all soft wallets support all currencies. Some wallets will only accommodate Bitcoin, for example. Others support hundreds of currencies, but the one you trade most often may not be among them. From a security perspective, it’s never a good idea to keep too many assets in a single soft wallet. You don’t want to lose your entire fortune to one hack.
Many experts believe that having both hard and soft wallets is the smartest way to approach holding crypto. Think of the way you bank. Most people use their savings accounts to store large amounts of cash. They transfer money into their checking accounts on an as-needed basis. And they don’t have too much cash in their pockets at any time, period. That’s a great way to approach using crypto wallets. Keep the lion’s share of your assets in the most secure location: your hard wallet. Then transfer small amounts of crypto into one or more soft wallets when you need quick, convenient access to your holdings.
Summary of Safety Tips for Secure Crypto Trading
- Just like any other password, never share your private keys with anyone
- Always use a private internet connection when transacting crypto business
- Learn to recognize common crypto scams
- Use only reputable, well-researched crypto exchanges
- Once purchased, move your crypto assets to a private wallet
- Don’t keep large sums of crypto in a single wallet
- Use a hard wallet to store the vast majority of your crypto holdings
Susan Doktor is a journalist who specializes in personal finance. She covers a wide range of topics, including cryptocurrency, cybersecurity, and investing. Her contribution comes to us courtesy of Money.com.
Masab Farooque is a Tech Geek, Writer, and Founder at The Panther Tech. He is also a lead game developer at 10StaticStudios.
When he is not writing, he is mostly playing video games