Top ways to keep your cryptocurrency wallet safe and not end up losing millions due to a lost password or hard drive

• Storing cryptocurrencies is a tricky business since they consist of a public and private key and are entirely decentralised.
• A plethora of users lose access to their wallets due to unforeseen circumstances such as lost passwords, misplaced hard drives, and more.
• According to a study, almost 40% of cryptocurrency owners have lost their passwords at some point.

There have been numerous stories about users losing access to their cryptocurrencies because they forgot their wallet passwords. While resetting a password is usually a hassle-free experience on the internet, cryptocurrencies are stored slightly differently.

If you have kept aside a few Bitcoin in a hard drive somewhere, don't forget the password at all costs. Because if you do, there's practically no way you'll be able to retrieve those coins. It is equivalent to permanently burning them away for nothing, like German programmer Stefan Thomas found out in January.

Thomas had over 7,000 Bitcoins stored on a secure hard drive — an IronKey device that allows for 10 login attempts. His Bitcoin stash, worth $220 million at time, was rendered inaccessible after he lost his password. The massive loss made Thomas reassess how he judged his self worth. “

Stefan Thomas is only one of many examples

Thomas' tale of frustration is only one of many. A UK citizen offered local authorities more than $70 million for them to allow him to excavate a landfill site, where he believes his lost hard drive may still be retrievable.

In another instance, James Howells, an IT expert, accidentally threw away his hard drive containing 7,500 Bitcoins while cleaning his office in 2013.

Back then, the cryptocurrency was extremely nascent and had little value. Today, those Bitcoins would be worth more than $280 million. He has contacted engineers, environmentalists, and data recovery experts worldwide to try and recover the lost fortune.

But, not everything happens due to human error. Sometimes uncontrollable and unpredictable circumstances can get in the way too. A family based out of US’ capital city, Washington DC, lost $6 million worth in Ethereum after their house caught fire and the corresponding JSON file, which contained the password, failed to open the firewall.

People have lost roughly $140 billion in Bitcoin because they forgot their passwords or got locked out of accounts. And, would-be millionaires are struggling to access their wallets.

According to a study, almost 40% of cryptocurrency owners have lost their passwords at some point. While 95.6% managed to recover their lost password, it still leaves a huge chunk of users in a lurch.

Those who lost their access have lost — on an average — $2,000 worth of cryptocurrencies. That's a huge loss. In comparison, India's gross domestic product (GDP) per capita was $1,900 in 2020.

So, why can't you recover a lost password?

A cryptocurrency wallet is a software that's used to store digital money securely. Cryptocurrencies have two keys. One is private and connects to the owner, whereas the other is a public key.

These cryptographic keys help establish a unique identity within the blockchain. The device or service on which your Bitcoin wallet is stored has the private key, not the coins themselves. Simply put, the coins themselves are always held on the blockchain, whereas your private key is required to authorise transfers.

You can receive crypto assets through your public address, but a private key is required to send anything.

The blockchain ledger keeps track of the complete history of every coin on its network. Since the blockchain is decentralised, a mundane ‘reset password’ option isn't available because credentials belong only to the respective users — the login details are not saved on a centralised database.

Hot and cold

There are various methods available to leverage a wallet. But the most recommended practice is to keep two wallets — one for trading or regular transactions and another for long-term holding.

These digital wallets are further divided into two categories — hot and cold.

Hot Storage: It refers to any crypto wallet that is directly connected to the internet. It can be accessed via your browser, a mobile app, or any other implementation. Since it's connected to the internet, transactions are easier to perform and require minimal effort. You can compare this to an ordinary bank account, accessible via the bank's website/app for third-party protocols like NEFT, UPI, and IMPS.

Cold Storage: These wallets are entirely disconnected from the internet and reside on independent storage solutions such as a pen drive, hard drive, or even a computer. There's also a seed key that acts as a backup in case you lose the hardware. But if you lose the seed key and the drive, there's no turning back. From a long-term storage point of view, this is the most secure storage format, and the seed key should be kept far away as a backup.

Most commonly used methods of storing cryptocurrencies in real life:

Web Wallet: The private key is stored by a third party on a web server, and it can be accessed via a website or app -- crypto exchanges like WazirX, CoinDCX, and more leverage this method to store your holdings. Here, your crypto exchange account password matters the most and switching on 2FA (two-factor authentication) is highly recommended. It can help thwart hacking attempts, or in case the primary credentials are compromised in an attack.

Desktop Wallet: They are installable software available for PCs and work in tandem with an anti-virus. That's done to prevent connection to the internet, which could pose a risk. The private key is locally saved in a virtual layer. A few examples are Exodus, Bitcoin core, and Electrum.

Hardware Wallet: These are similar to old PIN generating devices used by conventional banks not long ago for 2FA. A small display and a USB port team up to provide a portable stick to store private keys. They are available in different forms and offer reasonable amounts of control. It's difficult for amateurs to operate and are usually limited for professional or critical use.

Paper Wallet: It is a physically printed QR coded form wallet. These codes can be used to execute digital money exchanges. They are not prone to hacking but pose a significant risk of being misplaced. A major flaw is, they cannot be used for partial transactions. These are being actively phased out since users prefer hardware wallets and their flexibility.


SEE ALSO:
Polygon’s new Meme Market is a crypto platform exclusively for memes and online trends
Top 10 cryptocurrencies in the world — the story behind Bitcoin and other altcoins