It has become very important for investors to have a sense of security that their investment is safeguarded in their crypto assets.
The cryptocurrency market is fragile and complicated. There is not just worry about cyber threats but also less clarity on what happens to investments when a cryptocurrency exchange goes bankrupt.
Earlier this month, investors went into a panic selloff in Solana after some users reported that their funds were drained without their knowledge from their “hot" wallets including Phantom, Slope, and TrustWallet. Solana has estimated to witness millions of dollars of losses due to this cyber hack.
Solana's wallet hack was just another casualty of cyber threats. The crypto market has seen a spike in hacks over the past few years.
In its latest report, Chainalysis estimates that $2 billion in cryptocurrency has been stolen across 13 separate cross-chain bridge hacks, the majority of which were stolen this year. Attacks on bridges account for 69% of total funds stolen in 2022 so far.
"This represents a significant threat to building trust in blockchain technology. As more value flows through cross-chain bridges, they become more attractive victims for hackers," Chainalysis, the blockchain data platform said.
Earlier, the Chainalysis report revealed that cryptocurrency-based crime hit a new all-time high in 2021, with illicit addresses receiving $14 billion over the course of the year, up from $7.8 billion in 2020.
Meanwhile, due to deep volatile market conditions, many crypto exchanges and financial services providers like Celsius Network, Babel Finance, and Voyager Digital among others have suffered from a liquidity crunch which has forced them to opt for bankruptcy. This has led to a freeze of investors' assets as well.
While cyber threats and bankruptcies are beyond investors' control. However, there are still ways to safeguard your investments in cryptocurrencies.
There are two types of wallets where an investor can store their cryptocurrency assets. These are cold wallets and hot wallets.
Cold wallets are less risky and the information remains with the customers. These are offline, hardware wallets in the form of physical medium which reduces the chance of getting data leak and theft among others - until and unless the user shares his or her details with someone else. Typically, cold wallets do not require an internet connection, however, are less convenient. Also, the options for cryptocurrencies are limited here as many usually trade in hot wallets.
Coming to hot wallets, these are connected to the internet and are part of the cryptocurrency exchanges --- hence they are more vulnerable to cyber hacks. However, they are faster and easier to trade in cryptocurrencies. A user can store, send and receive tokens in hot wallets quickly and hence they are less time-consuming.
Cold wallets vs hot wallets: What is the best option to keep your crypto assets safe
Ashwani Kumar, Founder, HelperWorld said, "With crypto storage being the digital need of the hour, the ongoing debate on storing it in a hot or a cold wallet - the apt choice for holding your bitcoin and other digital assets has many aspects to it."
While Abhijit Shukla, CEO, and Director, Tarality said, "Between holding your cryptocurrency in a hot wallet - web-based, mobile and desktop wallets or a cold wallet - hardware, paper wallets, and physical bitcoins or even the best of both wallets - an exchange account hot wallet, a mobile hot wallet or a hardware cold wallet, a crypto user looks at credibility, functionality and overall security of their assets."
"While hot wallets don’t need an online-offline switch to make a cryptocurrency transaction owing to their ease of use, crypto hot wallets are vulnerable to virtual cyber attacks. On the flip side, cold storage wallets are seamlessly secure, however, these methods have been replaced by reputable, high-quality hardware wallets or very secure cold-storage options available on reputable exchanges," Shukla added.
In terms of cryptocurrency storage, HelperWorld founder said that cold wallets are known to be the staple of security while hot wallets are vulnerable to hacker attacks and scamming attempts. Moreover, cold wallets are known to be impenetrable, ensuring safety and security.
Notably, Tarality's CEO believes that hot wallets are becoming more secure and that cold wallets are getting more convenient.
Shukla said, "Lastly, over time, there has been a convergence of sorts — hot wallets are becoming more secure, and cold wallets are becoming significantly convenient, striking the right balance between the asset functionality and security."
"To conclude, it is imperative to have a hot wallet connected to the internet in order to keep a limited number of coins inside for ease of use. However, for security purposes, use a cold wallet to store the bulk of your assets so they're least accessible to potential hackers and cyber threats," Kumar said.
