Cryptocurrencies offer people full sovereignty over their funds for the first time in history, and this sovereignty can be achieved simply by preserving their seed phrase. (sequence of random words to access your crypto wallet). However, having full ownership and control over funds comes at a cost: The responsibility of efficiently storing and securing your funds. If you commit a mistake, such as losing your seed phrase or signing a malicious transaction, it can result in losing all your funds. How to secure your crypto assets? For maximum security, use multiple cold wallets and store your seed phrases in metal seed in two places. If you want to store it online, use MultiSig wallets.
There are also some other security practices that you can implement for even more advanced security, but it depends on your personal needs and situation. In this PlasBit analysis, we’ll discover how to secure your crypto wallet depending on the situation and requirements.
How to Secure Your Crypto? Understanding your Needs
First of all, we should reflect on the fact that there is no unique solution that fits every kind of need since some situations may need to prioritize advanced security, while others are easy to use. So, how to secure your crypto wallet? Let's start understanding your needs by formulating 4 hypotheses:
1) Low Personal Security
The lowest security level is using only a hot wallet to store your long-term holdings and execute daily transactions. We don't suggest implementing this solution since the more transactions you sign, the more risks of authorizing a malicious transaction are there. However, if you're only experimenting with cryptocurrencies and you're using a small amount of money, in the beginning you can use just a hot wallet for all your activities, since your priority could be ease of use instead of security.
2) Medium Personal Security
If you don't need to store large amounts of funds in your crypto wallet, a medium-security solution could be using only a cold wallet for all the operations, also signing transactions on Dapps and smart contracts for daily use. However, in this way, you could risk signing malicious transactions that allow scammers to drain your wallet's funds. In fact, even if a cold wallet is inherently secure, if you sign a malicious transaction, in some cases, scammers can implement an automatic function on the smart contract that authorizes them to withdraw funds automatically from your wallet. Consequently, a cold wallet should always be used combined with a secondary wallet.
3) Maximum Personal Security
If you need maximum security, you should use at least two wallets, and the primary one should function as a Valut: a cold wallet is the right choice for you since the seed phrase (the recovery random sequence of words that allows you access to the wallet) is stored offline and cannot be hacked. In this way, access to your crypto wallet is always offline. It consists of a piece of paper or metal with the seed phrase written on it, and you should accurately store it in a secure place. However, you should use this crypto wallet only as a Vault, operating only in and out transfer to another secondary wallet. This additional step is required to ensure that you've never had the possibility to sign malicious transactions on fraudulent smart contracts.
4) Institutional-Grade Security
For institutions and businesses, the security of funds should be the top priority, since losses can result in severe consequences and, in the worst cases, failures of the companies. Institutional and exchange platforms must split the funds in various multi-signature cold wallets, splitting the seed phrase in multiple safe and protected places. In this way, the decrease the risks by diversifying and adding more layers of security.
The funds are divided into various wallets, and each wallet is accessible only through the simultaneous signature of multiple trusted people. To execute daily transactions and operations, however, exchanges and institutional platforms also use hot wallets by depositing only a small minority of funds intended to offer liquidity for the platform's traders. In this way, they ensure the necessary funds for daily operations while protecting most of the treasury through multiple cold wallets and multi-signature verifications.
How to Secure Your Crypto? Step-by-Step Guide
1) Understand how crypto wallets work
The first step is learning and understanding how crypto wallets and blockchain work. You should assimilate various concepts, such as private and public keys, seed phrases, hot and cold wallets, blockchain explorers, and more. Once you gain a good understanding of the mechanics behind crypto transactions, you can proceed to the next steps. But remember, knowledge is your unique best friend in cryptocurrencies, and it can allow you to reduce your losses and become a profitable trader or investor.
2) Decide what is the best crypto storage solution for you
Not all people have the same security requirements and needs. Some people may prefer ease of use instead of advanced security, and it could make sense if you're not holding large amounts of cryptocurrencies. In your first steps in the crypto market, PlasBit recommends experimenting with small amounts of funds using a simple and easy-to-use crypto wallet. However, once you've experimented and learned about crypto transactions, we strongly advise implementing higher security measures by using multiple wallets for multiple goals. Use a cold wallet for your long-term holdings and a hot wallet for your daily transactions. For maximum security, use your cold wallet only for in and out transactions from your hot wallet, ensuring that you never sign transactions on malicious smart contracts with your main wallet.
3) Open your first crypto hot wallet
Mistakes are common in cryptocurrencies, and you'll probably commit some of them. Consequently, start with small amounts and use a common free hot wallet like Metamask to gain knowledge and experience as fast as possible. Starting with small amounts of cryptocurrencies and a hot wallet allows you to experiment, learn, and commit mistakes without the fear of losing relevant money, making your learning path faster.
4) Get your first crypto cold wallet
Once you've gained experience and are ready to invest more relevant amounts of funds, it's time to get a cold wallet. There are various types of cold wallets, and the most famous providers are Ledger and Trezor. A cold wallet allows you to keep your seed phrase (the random sequence of words that grants access to your crypto wallet) always offline, avoiding the risks of hacks. In fact, cold wallets are designed to never store your seed phrase online, and you're the only one that controls it. Consequently, the only way to steal funds in a cold wallet is to physically steal your seed phrase from your designed secure place. As you can understand, the risks are remarkably reduced compared to those in a hot wallet.
5) Always watch out for new risks and scams
The crypto ecosystem is dynamic and changes continuously. Sadly, scammers are always ready to create new types of fraud, and you should always be updated on the latest trends in crypto scams to learn how to prevent falling for them. Even if you implement the highest security measures, We recommend never sharing your personal information online, and always avoid interactions with unsafe projects or smart contacts. Before investing in a crypto project or signing smart contract transactions, verify the reliability and security of them.
6) Advanced Security Measures
If you're a big whale with large holdings of cryptocurrencies, a cold wallet could not be enough since scammers can try to physically steal your seed phrase from your secure place. For institutional investors and crypto platforms, the best choice is always to implement institutional-grade security measures, using multiple cold wallets (diversifying and reducing risks) and implementing multi-signatures for transactions (requiring more than 1 person to sign a transaction).
Common Risks of Crypto Market
Cryptocurrencies can be exciting, but they can also carry various risks and threats. Your best friend in crypto should be your knowledge since you need to recognize the most common crypto scams to avoid being trapped in fraud and scam schemes. At PlasBit, we conducted various crypto research studies to analyze and understand the common crypto scams in detail, so let's study the most dangerous ones better.
Pump-and-Dump Schemes
New investors usually think they can and must make money in just a few days, and a small fraction of a positive percentage every day is not enough. Not focusing on compounding interest and long-term growth, new investors often fall into pump-and-dump schemes, attracted by the possibility of making easy money and FOMO (Fear of missing out). However, when an opportunity seems too good to be true, it probably is. When token launches are overhyped, and the team focuses on FOMO instead of valuable services and products, promising unrealistic returns, you should be aware that it could be a potential pump and dump. In this type of scam, the team holds the majority of tokens, and during the sale, in the moment of maximum hype and traction when the price pumps, they sell all their holding and leave the projects, disappearing.
Ponzi Scams
In Ponzi scams, the scammers attract investors by promising remarkable returns in a short time, but they pay the first investors with the money of new investors, inflating the hype and the traction of the project. Once the scammers are not able to attract new investors, the scam comes to light since there are no funds to keep paying the returns to the new and old investors. The scammers basically inflated the value of the project by creating artificial rewards, but there is not a valuable business behind it, and the project is not sustainable for a long time. Also in this case, when the scam is evident, the scammers disappear into thin air.
Crypto Romance Scams
You should always be careful with the personal information you share online. In crypto romance scams, in fact, the victims are contacted through dating apps, crypto communities, or social media platforms, and the scammers try to create a trusted relationship with the designated victims. The relationship can last weeks or even months, and the scammers want to gain the victims' trust to convince them to invest in cryptocurrencies through the scammers' "favorite crypto platform." However, once the victim starts to invest by sending the money to the "trusted partner", the scammers start showing fake trading dashboards and wallet balances, making the victim believe that he is actually making money on crypto. However, once the user tries to withdraw notable sums of cryptocurrencies, they recognize the scam since the withdrawals are impossible, and the scammers disappear with the loot: The platform was fake, and the money had never been invested.
Address Poisoning Scams
Even if you implement the highest security measures for storing cryptocurrencies, sadly, scammers are always ready to create new ways to scam people. In address poisoning scams, the attackers scrape the blockchain explorers, searching for users that move large sums of cryptocurrencies with a recurring address. Once identified, the scammers replicate the address with which the victim usually interacts, just changing a character and sending the victim a small amount of cryptocurrencies. The scammers hope that, given that their address is similar to the recurring one, the victim inadvertently copies and pastes the address from the latest transaction, mistakenly sending money to the scammers. You must always verify the address you're sending the money and never copy and paste it from your transaction history.
Crypto Influencer Impersonification
Another common crypto scam that usually starts on Youtube or Instagram is the crypto influencer impersonification. In this kind of fraud, scammers use AI tools and advanced video and voice editing programs to manipulate existing videos of relevant crypto KOLs and founders and promise rewards to all those who send cryptocurrencies to a specific address. Usually, they announce it as an "incredible giveaway", in which you send a certain amount of cryptocurrencies, and you'll receive double the amount in reward. Of course, it's a scam, and once you send cryptocurrencies to the scammers, your money is lost. As always, if something seems too good to be true, it probably is.
Exchange Hacks
As we have already analyzed previously, if you've invested a considerable amount of cryptocurrencies, you should never use only a hot wallet on an exchange. In cryptocurrencies, we often say "Not your keys, not your coin", meaning that if you rely on the exchange's infrastructure to store your crypto, you're actually not owning them directly, and you're entrusting a third party to keep your crypto safe. In some cases, it could be a good idea, but in most cases, not: If the exchange is hacked, you'll likely lose all your funds. Instead, if you store your main holdings in a private cold wallet, you have full ownership and sovereignty over them.
Smart Contract Breaches
Another scam you need to be aware of is based on smart contract breaches. What does it mean? Cryptocurrencies and DeFi rely on smart contracts, contracts written in code and transcripted on the blockchain. Smart contracts, once deployed, execute specific actions automatically based on predefined parameters or external inputs. However, if there is a point of failure in the smart contracts, hackers can exploit it to write malicious code snippets and drain assets from users that connect their wallets to that specific smart contract. Keep your crypto safe, do not sign suspicious transactions, and do not engage with unreliable smart contracts, projects, and platforms.
Social Engineering Tactics
Scammers are organized and have studied the most effective manipulation tactics to leverage your weaknesses and steal your crypto assets. As with crypto romance scams, scammers can target specific victims who are more suited to fall into the scam and utilize advanced manipulative tactics to gain trust quickly. For example, they can present themselves as crypto security experts, famous traders, or more, convincing you to entrust them with your crypto holdings. Remember, no one does anything for free. If a stranger approaches you online, it's likely a scammer who wants to gain your trust to steal your crypto. There are various examples of scams based on social engineering tactics, such as the recovery scam and more. Watch out and beware of online strangers approaching you.
5 Common Red Flags to Watch Out For
If you're planning to invest in a crypto project or you're using a crypto platform, you should be able to recognize the common red flags to avoid losing money on crypto scams or unsecured projects. These are the 10 main red flags to watch out for:
Promises of unrealistic returns
As we usually say: "If something is too good to be true, it probably is". Never trust projects and platforms that promise high, secure returns in a short time. Remember that the average return of the S&P 500, the main benchmark of the stock market, is around 9/10% yearly, and it's considered a good return for investors. If projects promise 1% a day or 10% a month, for example, they are probably scams or misleading projects.
No audits on Smart Contracts
Blockchain technology can allow for increased security and transparency. However, a single error in the smart contract code can allow hackers to steal assets from users who interacted with the smart contract. Always verify that the project's smart contracts have been verified by external and authoritative blockchain security audit firms. Never engage with suspicious smart contracts and transactions.
Fake or Inflated Community
In Web3, communities can be considered the main indicator of the health status of a project or platform. However, some projects use bots or paid members to improve the appearance of the project, manipulating users to believe there is a big existing and healthy community. However, in some cases, the members are fake, and the project is manipulating you to improve your project's perception and invest more.
Anonymous Team
Another common red flag you should watch out for is the team. If the team is anonymous or seems fake, stay away from that project since it could not be considered reliable. Anonymous teams are commonly used in rug pulls, pump-and-dumps, Ponzi, and other types of scams. If a project has good intentions and structured plans, there is no sense in making the team anonymous. You should always verify if the team behind a project is legit and trustworthy.
Lack of Valuable Services or Products
One of the most common reasons for which crypto projects fail is the lack of valuable use cases. Without providing valuable services or products, a project cannot be profitable in the long term since the core business cannot generate returns. Additionally, some projects miscalculate users' needs and aim to solve problems that no one actually cares about. First of all, verify that the project is solving a high-demand problem by providing innovative services or products. If there are no use cases, the projects cannot build a sustainable business, and they will likely fail in the medium term.
How to Secure Your Crypto? Decreasing the Impact of Common Risks
In this PlasBit insight, we've explored various security measures that could suit different investors' situations and needs. We've always learned the most common crypto scams, empowering users with the needed knowledge to easily recognize possible red flags and prevent them from being trapped in crypto scams. Remember, cryptocurrencies can offer full sovereignty and ownership of assets, but this responsibility comes at a cost. If you want to implement the highest security measures, you should study and learn, dedicating time to understanding the mechanics behind the blockchain and the most common scammers' frauds. Knowledge should be your best friend in cryptocurrencies since the more you know, the more you can avoid losing money and becoming a more profitable crypto trader. It's always more difficult to recover a loss than make a profit, so remember the famous quote of Warren Buffett: "The first rule of an investment is never lose money. The second rule is never to forget the first rule." PlasBit believes in a future in which people can finally reach their financial freedom through full ownership and sovereignty over their assets, and we'll always be here to provide you with the needed information and tools for a safe journey in Web3 and cryptocurrencies!
