Crypto Wallet Security: Best Ways to Protect Your Digital Assets

What is it like to lose your entire portfolio on a security mistake you could prevent in two minutes? Crypto wallet security is underrated until it’s not. There are many ways to lose money other than trading, and cyber-attackers don’t precisely care about the size of your account.

We often associate cyber-threats with crypto security. But there are more likely ways to lose crypto that don’t involve malware or fraud. And if you don’t want to find out, it’s worth learning the most common mistakes.

Whether you use a cold storage wallet or web wallet, ERC-20 tokens, or NFTs, there’s always something you can do to protect your digital assets.

Crypto Is NOT as Secure as People Think

Blockchain technology is in many ways safer than traditional financial systems. Crypto wallets are not. Why?

Take Ethereum for example. It’s a decentralized network with autonomous, trustless programs (called smart contracts). It uses a secure proof-of-stake mechanism to keep consensus in a public, immutable database.

However, there are thousands of ways to buy Ethereum. You can use exchanges, crypto-fiat platforms, P2P sites, wallet companies, or decentralized applications (Web3 wallet dApps). While the Ethereum network might be “secure,” the platform used to store crypto isn’t necessarily:

• You might be investing in decentralized cryptocurrencies from a centralized, custodial wallet
• The blockchain might never get hacked, but maybe your exchange does
• You might have Metamask private keys, but if someone gets them, you no longer have full control

We should not confuse blockchain-level and app-level security.

e.g., A wallet built on the public Ethereum network isn’t the same as a wallet built on privacy blockchains like Monero.

You can still lose security in an app built into a secure network. Inversely, an app cannot guarantee security if the network doesn’t. You need both.

That doesn’t mean you shouldn’t use popular blockchains because they’re not secure enough. They’re worth using, as long as you know how to prevent risks and compensate for their limitations. 

3 Ways We Lose Crypto Wallet Security

When planning crypto wallet security, this is the most concerning problem:

Someone Steals Your Crypto

Cryptocurrency is achieving fast mass adoption, and crypto scams are no exception. Not only are there more fraudsters, but they seem to come up with new schemes as quickly as blockchain innovations happen. It’s not surprising their biggest successes occurred right after Bitcoin’s 2017 boom, or the 2020 DeFi summer, or the 2021 NFT hype, or now with Metaverse.

The fear of missing out on these trends is what makes people vulnerable to so many tricks. Namely:

• Impersonation of platforms, tokens, and influencers
• Ponzi schemes where the only project’s “utility” is making money
• Fraudulent platforms or apps that either steal your information or lock in funds
• Customer support “assistance” for made-up security issues (phishing bait)
• A project that’s abandoned as soon as it gets high-volume funding and pre-sales
• Cyber-attacks on custodial-wallet platforms

While these are the most alarming events, you’re more likely to lose money the second way.

A “Trusted” Party Removes Your Permission

Until recently, centralized platforms were the norm. If you want to use financial services or buy crypto, you go to the most popular exchange. Many have liquidity, which allows companies to offer higher returns or lower fees than most dApps.

Where is the problem? It’s a trust-based relationship, which defeats the purpose of trustless blockchains:

• Once the company no longer trusts that you’re following their conditions, they can restrict your account. No warnings, little to no support, wrong-until-proven-right.
• The party has the right to change services and conditions anytime.
• You never see your private keys because the company keeps them instead.
• You don’t control the platform’s security, or if they use your funds for liquidity.
• Companies follow business interests, so their actions will eventually get in the way of your investment decisions.

The alternative to delegated custody is self-custody, which has its own risks. Calculated, smart risks.

You Lose Your Crypto

When you take control of your crypto wallet security, a lot can go wrong. Especially when buying crypto the first time:

• You can forget your private keys, lose them, or not write them down at all.
• You lose your device and have no keys. Or someone else finds it and steals the funds.
• You store your private keys online or share them by mistake. Now someone else can access it.
• You send a large amount to a crypto address with a typo. Or it’s not on the right blockchain, or it doesn’t accept that token.
• You add the wrong custom network or use the wrong custom token address.
• Forgetting to check network fees because you’re sending in a hurry.
• Forgetting to revoke access from inactive dApps

You can learn these by losing money on mistakes, or you can learn them now with the right security habits.

7 Do’s and Don’ts of Crypto Wallet Security

Whether it’s a scam, a custodial platform, or yourself, there are two things to know about crypto wallet security:

• It’s inevitable to lose sometimes because security is never guaranteed.
• You can prevent losses regardless of who’s in control if you make good decisions.

Here are the steps from most to least important:

Don’t Fall for Phishing Scams

The easiest way to fall for fraud is to believe there is none. Scammers trick people because they impersonate the last people you would suspect. It might be Michael Sailor, the Binance team, Ledger customer support, or the market analysts you follow on social media.

Sometimes it’s a misspelled chatbot, sometimes it’s not that obvious. If they’re using these tricks, it’s because someone falls for them. You don’t want to be that person.

There are several scams in crypto, but the most common by far is phishing/impersonation:

• Fake communications from trading platforms
• Bitcoin rewards credited to your “account”
• Contests that require you to enter the Metamask seed phrase
• Giveaways where influencers double your crypto during live interviews
• Spyware email links
• Fake login screens

Simply don’t share private keys with anyone (including support teams). As for email messages, watch for the unique phrase and email address of the sender. As for money opportunities, they’re easier to expose when you ask on online communities.

Beware of Airdrop Schemes

Airdrops are marketing strategies that introduce new projects to their first community users. They get free tokens for participating, and if it’s a good project, people will share it with others. Plus, you’re more likely to hold crypto when you get it for free.

Sometimes, airdrops are baits for phishing scams:

1. Post the airdrop event on social media.
2. Go to the website to claim your free tokens or NFT.
3. Connect your WEB3 wallet.
4. Connection error. Enter the seed phrase or private keys to claim.
5. Either you’re sent to a 404 page or receive digital assets with $0 value.

This sequence allows scammers to access your wallet funds. And while it doesn’t show your tokens, they can go to block explorers to find out from your transaction history.

If something seems too good to be true, remember there are countless airdrops out there. You’re not missing out if you don’t take the risk.

Don’t Just Sign Every Single WEB3 Contract

The three common contracts you will sign are:

• Connect wallet to the platform (safest)
• Approve token spending permission (riskiest)
• Confirm transaction

The first “contract” is free and gives the platform the permission to request further contracts. The token approvals ensure that smart contracts can only use the approved token for an amount. If you’re swapping 1 ETH for PLS, you might get a request to enable PLS for equivalent to ~1 ETH.

However, a fraudulent platform might request something different. Like enabling all tokens for unlimited quantities. Or granting permission to auto-approve any transactions. Many smart contracts also have admin keys, a form of special control that allows founders to break the rules of their protocol.

Read carefully before signing contracts. If you believe the platform is secure, you can create a secondary wallet just to be safe. You send only the tokens you will use and remove all permissions when done.

Double-Check Blockchain Addresses

This is one of the most stressful ways of losing crypto. Imagine sending a large crypto amount and it never arrives. Maybe the network is congested, maybe you wrote the wrong address, maybe it’s a different network.

A rule of thumb is to make test payments when possible. If it succeeds with $50, it will go through with $10,000. If it doesn’t, at least you lost nothing and can try something else.

To avoid lost transactions:

• Copy the wallet address rather than retyping it. You can also use QR codes to verify it’s the right one.
• Make sure you’re using the right blockchain, there’s no congestion, and you have enough balance for fees. If you’re on Ethereum Mainnet, fees might swing from $10 to $50+ depending on trading volume.
• If you sent money successfully before, it’s better to copy the address from your history than write it again.
• When adding custom tokens, double-check that they match their market cap and USD price. Otherwise, it’s a scam coin. You can preview a conversion to USDT in most DEXs to verify their price.
• When expecting a payment, ask the sender for the block explorer receipt link. If you didn’t receive it, this page will show if it’s processing, if it’s a network problem, or if they used the wrong address.

Don’t Share Your Private Keys

Sharing your private keys is like granting all admin permissions. You wouldn’t do that with a WEB3 platform, yet we do it all the time with regulated exchanges. Centralized platforms don’t share your privates with you, and neither should you.

To find your private keys, you go to settings and enter a password. It’s an alpha-numeric code that should store offline in case it’s lost or breached. Same with the 12-to-24-word seed phrase.

If you have to share them, do this instead:

Add Extra Verification Steps

Even when sharing with a trusted person, they can still accidentally put your private keys at risk. You can share control and still protect your wallet with a multisig wallet. This means a transaction requires the approval of all admin devices or users involved.

It’s like having your own private blockchain for your team. If you try to set multi-signature keys with Gnosis Safe, you’ll find out it’s easier to do than it sounds. With this security system, you can connect to 10+ web wallets like Metamask and use all Ethereum dApps.

You can add further verification steps with phone numbers, fingerprint screen locks, 2-factor authentication, and hardware keys.

Upgrade Crypto Wallet Security

Would it make sense to you if you could protect your life crypto savings with $100? Hardware wallets like Trezor cost less than that, and the value you get is priceless. As new models come up, hardware keys become safer, support more coins, and even interact with WEB3 apps.

As long as you store your private keys online, you’ll always worry about what happens to them. Will there be a cyber-attack on your exchange? What if someone is spying on your devices?

You can keep it offline on a piece of paper you’ll probably lose. Or like the keys to your car, you can get a physical device to keep your investment vehicles. Or if you prefer online wallets instead, you can still limit their access with your Trezor device only.

Crypto Wallet Security Is Underrated (Until It’s Not)

While important, crypto wallet security isn’t always the priority. It’s part of the risks of owning crypto assets. If you only use the safest platforms, you might miss out on many projects that have better features, fees, or price potential.

Sometimes a bit of trust can go a long way if you understand risk. The large exchange might be convenient, but they’re terrible savings accounts.

The answer isn’t to disregard security or overvalue it. It is to understand the common security problems, so you can prepare and prevent them from losing your crypto in the first place. Web3 wallets are a great improvement from centralized platforms, but crypto wallet security is still our responsibility.