Cryptocurrencies, like Bitcoin, are stored in digital wallets. A Bitcoin wallet is a secure place to store your Bitcoin. The wallet communicates with the Bitcoin blockchain in order to tell it when you want to send and receive transactions. So while the blockchain is the information layer that stores transactional information, the wallet is like your ‘digital safe’.

When you create a Bitcoin wallet, a unique, randomly selected 256-bit-long number is generated and assigned to your wallet. The private key acts as a ‘key’ to unlock the Bitcoin in your wallet so it can be sent to another Bitcoin address.

The keys to crypto

Managing your private keys is an important part of keeping your account safe. Cryptocurrencies use cryptography to secure access.

Public-key cryptography works like a post box (in this case, the post box is your crypto wallet). Anyone with your post box address can mail money to you, but the only way to spend the money inside that post box is to have the key to open it.

In crypto terms, this is often referred to as a private key. Each key has a corresponding wallet address. Without it, no one is capable of accessing the cryptocurrency in your wallet. So it's really, really important to keep private keys safe from getting stolen or lost.

The two secure methods for storing cryptocurrency: cold wallets and hot wallets

The simplest way to describe the difference between a cold wallet and a hot wallet is that cold wallets are not connected to the internet, while hot wallets are. Both are designed for different purposes and in many instances, people who hold cryptocurrencies can have both.

Hot wallets are like cheque accounts, while cold wallets are similar to a savings account. People don't tend to keep the majority of their money in their cheque account, rather keeping the vast majority of their money in a savings account. A cold wallet is a preferred choice for people who want to have more control over their cryptocurrency, and who are generally well-versed in cryptocurrency.

Luno makes use of both offline and online storage, used in combination to go a step further in keeping our customers’ Bitcoin secure.

Here are some questions you should ask before signing up with a crypto exchange:

• Do I trust the team building the product or service?
• Do they understand and implement secure key storage?
• Do they have a strong technical and engineering background?
• Do they have security features like two-factor authentication or integration with security partners?
• Do they undergo regular security and financial audits?

When choosing who to trust with the safety of your cryptocurrency, remember to do your own research about the company. If the answers to these questions aren’t readily available for you to access, it’s probably wise to search for a more transparent company. 

Beyond the security measures the exchange you choose has, it’s recommended you use two-factor authentication, too. This adds an additional layer of security to your account.

Want to learn more? Read Luno's Bitcoin education series here.

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This article was paid for by Luno.