Crypto wallet hygiene: The basics of crypto wallet security
Thomas Sweeney
Apr 1, 2025・5 min read
Protecting your most valuable property is always a priority, and crypto is no exception.
But unlike money in a bank or stocks in a brokerage account, digital assets don’t come with built-in protections. If stolen, there’s no fraud department to call – once they’re gone, they’re gone. That’s why a secure crypto wallet is so important. It’s the first – and only – line of defense between your assets being safe or becoming an easy target.
In this guide, we’ll explain why crypto wallet security is so vital to protecting your crypto. We’ll also explore the different types of wallets, including hot wallets and cold wallets, and share a few simple crypto wallet hygiene tips to help you safeguard your holdings.
Why is securing a crypto wallet essential?
It’s simple, really. Just like locking your front door, setting a passcode on your phone, or protecting your credit card details, keeping your wallet crypto wallet as secure as possible is your first line of defense against theft. Bad actors are always looking for ways to exploit vulnerabilities in the crypto space – from phishing emails and malware to exchange hacks and social engineering scams. And unlike fiat, once crypto leaves your wallet, there’s no guarantee you’ll get it back.
The good news? A few simple habits can go a long way in protecting your digital assets, including cold storage, two-factor authentication (2FA), and keeping private keys offline (more on those below). First, let’s take a closer look at the different types of crypto wallets available.
Types of crypto wallets and their security levels
There’s no one-size-fits-all answer to choosing the most secure crypto wallet – each type has its own pros and cons.
Hot wallets
Also known as software wallets, hot wallets are apps that store the cryptographic keys needed to access the digital assets they protect on a smartphone, tablet, or computer. They’re always online (hence the term "hot"). Popular examples include Phantom, Trust Wallet, and MetaMask.
Hot wallets have multiple security layers, like firewalls, encryption, and 2FA. However, because they connect to the internet, they’re more vulnerable to cyber threats than cold wallets. Because of this, traders typically use hot wallets for smaller amounts of crypto or frequent transactions rather than long-term storage.
Cold wallets
Cold wallets function much like hot wallets but differ in how they store private keys. While hot wallets keep keys online, cold wallets store them offline, significantly reducing exposure to cyber threats.
Early cold wallets were paper wallets, which contained QR codes linked to blockchain addresses and private keys generated offline. Paper wallets still exist, but they’ve become less popular due to the risk of physical damage or loss.
These days, hardware wallets – like those from Trezor and Ledger – are more common. These USB-like devices store private keys offline and only connect to the internet via cable or Bluetooth when needed for transactions. Because private keys never stay online, cold wallets offer higher security, making them a popular option for long-term crypto storage.
Exchange (custodial) wallets
For traders who prefer a more hands-off approach to storing crypto, exchange wallets (also called custodial wallets) are a third option. Managed by centralized crypto exchanges (CEXs) or third-party custodians, these wallets don’t provide direct access to private keys. Instead, the exchange secures and manages digital assets on behalf of the trader.
For example, Coinbase users can buy, sell, and store crypto in a Coinbase-controlled wallet, but they don’t completely control their assets until they transfer them to a self-custodial wallet like MetaMask or a hardware wallet like Trezor Model One.
The biggest drawback? Counterparty risk. Since assets are stored on a centralized platform, users are exposed to potential issues like mismanagement, fraud, or exchange hacks. However, some custodial wallets offer insurance protections, which self-custodial wallets don’t.
For beginners, exchange wallets are generally considered the easiest option – no setup, no private keys to manage, and built-in security features. But with convenience comes trade-offs. While these wallets may provide added security measures, they also require trust in the platform holding your assets.
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The importance of counterparty wallet identification
Keeping your crypto secure isn’t just about protecting your own wallet – it also means being cautious about where and with whom you transact. Whenever investors interact with crypto exchanges, decentralized protocols, or P2P platforms, they need to consider the wallet on the other end of their transaction. For example, interacting with a new and untested decentralized finance (DeFi) protocol carries a higher risk than exchanging tokens on an established CEX like Coinbase or Gemini. In the former case, crypto investors need to take greater precautions with their wallets due to the higher risks of fraud, theft, or scam tokens.
Traders who engage in certain segments of the crypto market often create hot wallets specifically for opportunities like yield farming, airdrops, or initial coin offerings (ICOs). By setting certain wallets aside for less credible counterparties, they protect the bulk of their crypto positions while potentially capturing gains in the most volatile segments of the digital asset market.
Crypto security tips: Wallet security best practices
Securing a self-custodial wallet may seem daunting, but simple strategies exist to avoid a crypto catastrophe. With a few smart precautions, crypto traders can take full ownership of their digital assets without unnecessary risks.
Prioritize cold storage
For long-term storage, cold (hardware) wallets generally considered are the safest option. Remember, unlike hot wallets, cold storage devices (like those from Trezor or Ledger) keep private keys offline, making them far less vulnerable to hacks. While they cost more upfront, they’re the ideal solution for crypto investors who plan to hold significant digital assets for months or years.
Protect private keys
A private key is the only way to recover a lost crypto wallet, making it one of the most sensitive pieces of information a trader owns. Most wallets use a 12–24-word seed phrase written on paper or engraved on a steel sheet (e.g., Cryptosteel) and kept in a secure spot, such as a fireproof safe or a safety deposit box. For added security, some crypto traders create multiple copies with intentional errors or incomplete wordlists and store them in different locations.
Consider adding a passphrase
Some wallets offer an optional passphrase as an extra security layer that adds a custom password to the seed phrase. Even if someone steals the private key, they can’t access the wallet without this additional passphrase. This feature provides extra protection in situations where users may be forced to reveal their seed phrase under duress.
Be wary of phishing scams
No legitimate crypto company or wallet will ever ask for private keys or seed phrases. If you receive an email, text, or message requesting this information, delete it immediately. Scammers frequently impersonate exchanges and wallet providers, so always verify sources before clicking any links.
Use separate wallets for high-risk transactions
For activities like claiming airdrop, participating in ICOs, and trading non-fungible tokens (NFTs), it’s best to use dedicated hot wallets. This way, even if a smart contract exploit or scam occurs, only the assets in the high-risk wallet are exposed, keeping long-term holdings safe.
Crypto estate planning
Unlike traditional assets held by banks or other financial institutions, crypto holdings are self-custodied and don’t automatically transfer to heirs in the event of the owner's death. Estate planning helps ensure that trusted individuals can access and manage digital assets. Investors can do this by securely documenting seed phrases and passphrases, using multi-signature wallets, or utilizing crypto-friendly estate planning services. Otherwise, crypto assets can be permanently lost.
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Keeping your crypto safe starts with good wallet hygiene practices, like tracking activity, staying organized, and knowing where your holdings are. But juggling multiple wallets and exchanges can quickly get overwhelming.
CoinTracker simplifies everything by syncing with your accounts, giving you a real-time view of your portfolio while automatically tracking every transaction. With everything in one user-friendly dashboard, you can quickly assess your tax implications and generate IRS-compliant forms whenever needed.
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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.