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What are the Risks of Storing Crypto in Wallets

The crypto industry is growing fast, but so are cyber threats. Every beginner needs to understand the basics of crypto security before making their first investment.

For more information on crypto wallets, see our Beginner’s Guide to Crypto Wallets

Risks of Storing Crypto in Wallets?

Crypto wallet storage—whether hot (online) or cold (offline)—comes with its own set of risks. Here’s a breakdown of the main ones so you can see the full picture:

  1. Cybersecurity Threats 

Mainly targets online wallets such as desktop mobile, or web wallets

 

  • Hacking & Malware: Through phishing attacks keyloggers, or spyware, the hackers can steal your private keys.
  • Breaches of Exchange: Servers of an exchange where you have your wallet held can be breached.
  • Man-in-the-Middle Attacks: Public Wi-Fi makes you an easy target for theft.

2. Physical Risk

Affects paper wallets, hardware wallets, and any other storage device of keys

 

  • Theft: Your hardware wallet or paper wallet can be stolen.
  • Loss or Damage: Money may be made useless through fire, water, or even loss of a wallet.
  • Wear and Tear: Storage hardware devices can grow faulty over time.

3. Human Error

  • Passwords Lost/Seed Phrases: The money is lost forever once you misplace or forget them.
  • Inadvertent Transfer to the Incorrect Address: Cryptocurrency transactions are irreversible.
  • Poor Backup: Your seed phrase is at risk if stored in an insecure place, i.e. a cloud storage.

4. Social engineering and fraud 

  • Phishing scams: are when you are tricked into disclosing private keys by phony websites, applications, or customer service representatives.
  • Rug Pulls and Bogus Investments: These scams attempt to get you to send money to “opportunities” that don’t exist.

5. Custodial and Regulatory Risks

  • Frozen Assets: In case of a requirement by law, some custodial wallets can freeze funds.
  • Regulatory Changes: Unexpected legal requirements can prevent you from receiving the services in your country.

6. Backup and Recovery Failures

  • Single Point of Failure: Your money is lost if the only backup in your pocket is damaged or lost.
  • Unencrypted backups are vulnerable to theft in the event that your storage medium is compromise

Knowing the risks is only half the battle — you also need to know the right way to store your assets. If you haven’t already, check out bitcoin self custody crypto risks to start on the right foot.

A Few Key Takeaways

  • Secure for long term: Hardware wallet (offline retention, minimal attack threat)
  • Safest for regular usage: Non-custodial mobile wallet with powerful safety precautions
  • Great Risk:Web wallets (custodial) pose a great risk with regard to the possibility of malware and locked funds.
  • Only for proffestional:Paper wallets (sensitive to physical loss & user errors) are only for professionals.

Top Ways of Minimizing Risk

  • Use hot wallets for small positions and hardware wallets for big positions.
  • Store seed phrases off-line in multiple secure locations.
  • Double check wallet addresses once more, prior to sending.
  • Don’t give in to the temptation to download suspicious software or click suspicious links.

If you’re new to crypto, start with: easy-explanation-of-crypto-understand-in-5-minutes for a solid foundation.