Recently, Coinbase Crypto Exchange said in a filing with the SEC that if a company goes bankrupt, people holding crypto assets on its platform could lose direct rights to their assets. The disclosure of one of the largest crypto exchanges in the world has sent shockwaves through the community. Well, “Not your keys, not your coins” is a commonly used but rarely followed concept in the crypto world. To put it in simple terms, this means that if you don’t have control of your private keys, you don’t actually “own” your crypto.
What are encryption keys and wallets?
The first thing to know is that cryptocurrencies are very different from other things you invest in.
When you buy gold, you actually get coins (or bricks) of the shiny metal. You can keep these coins safe in… a safe! Similarly, when you buy a house, you actually get its physical “ownership”.
Crypto is very different in these terms. You really don’t get anything physical. Your crypto journey starts with a “wallet”.
This is what a typical Bitcoin wallet looks like:
[private] => fa9af8856397ab2fcd0546cd248791ad9a3046aa3d49fddbdc380ccbce4a5527
[address] => 1Mk13r5uu51F5jQ6yGuBPxkuZw91nM4MeY
The address is similar to your bank account or UPI ID. Anyone can send crypto to your address. If you send crypto to the “wrong” address, it’s gone forever!
Also keep in mind that the same address does not work for all cryptos. For example, a Bitcoin address will not work for Dogecoin.
The private key is what you would need to “sign” transactions, which will send the crypto to someone else. If someone gets their hands on your private key, they can transfer all your crypto to another address. This is what happens in many “crypto hacks”.
A crypto wallet is designed to:-
1) Store your public and private keys
2) Send and receive cryptocurrencies
3) Monitor “sales”
4) Interact with supported blockchains
Here are the types of crypto wallets
If your wallet gives you full control over your private keys, it is a noncustodial wallet. Examples: paper wallets, hardware wallets and software wallets.
If your wallet does not give you full control over your private keys, it is a custodial wallet. For example, wallets operated by centralized crypto exchanges. Binance, Huboi Global, Coinbase (Pro), and Kraken are popular centralized exchanges, according to CorporateFinanceInstitute.
If you literally write your address and private key on a piece of paper, it would be called a paper wallet. They are inconvenient to use but are the safest option. Consider using these if you have a large amount of crypto to hold for a long period of time.
Usually, people store their crypto in a mobile or web wallet. This is a mobile app or web service that stores your keys and addresses. Metamask is a popular browser-based crypto wallet.
A “hot wallet” is one that is connected to the Internet and is considered the most vulnerable to hacking. Examples include mobile wallets and crypto exchanges.
A cold wallet, on the other hand, is not connected to the internet and is considered more secure. Examples include hardware wallets and paper wallets. There are many free services for generating paper wallets, such as the Future Money Wallet.
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Unintentional FUD created by Coinbase
Coinbase Global, one of the largest crypto exchanges in the world, holds $256 billion (approximately Rs. 19,82,195 crore) in fiat currencies and cryptocurrencies on behalf of its customers.
Its recent SEC filing stated that “the crypto assets we hold on behalf of our clients could be subject to bankruptcy proceedings.”
This means that Coinbase users would not be entitled to claim specific Coinbase ownership. Their funds would become inaccessible!
I think a lot of crypto investors will start using non-custodial wallets instead of custodial exchange wallets.
Ledger, the French hardware crypto wallet company, is taking steps to educate people about the uses of private crypto wallets, like the ones it provides. These wallets allow people to hold their crypto assets on their own, reducing the risk of losing them to hacks or breaches.
In November last year, Tesla CEO Elon Musk backed the idea of investors keeping custody of their crypto assets like Dogecoin, rather than relying on centralized exchanges like Binance and Robinhood.
These exchanges make it easier to sell and buy cryptocurrencies, but also retain custody of those assets, which Musk doesn’t seem to support.
Rohas Nagpal is the author of the Future Money Playbook and chief blockchain architect of the Wrapped Asset Project. He is also a retired amateur boxer and hacker. You can follow him on LinkedIn.
Cryptocurrency is an unregulated digital currency, which is not legal tender and is subject to market risk. The information provided in the article is not intended to be and does not constitute financial advice, business advice or any other advice or recommendation of any kind offered or endorsed by NDTV. NDTV shall not be liable for any loss resulting from any investment based on any perceived recommendation, forecast or any other information contained in the article.