Hot wallets are a means of storage for cryptocurrencies, that are connected to the internet. These wallets are free and relatively easy to set up. Thus, most of the first time users prefer this mode of storage. It comes in various formats like:
As different wallets support different cryptocurrencies, one needs to pick an option that works in line with their investment goals.
What are the Reasons to Insure your Crypto?
Since hot wallets are associated with large sums of money online, they are automatically exposed to a variety of risks and frauds making it essential for users to have them insured. Some of the compelling reasons to have these wallets secured are:
1. Human Error/Carelessness
This is the greatest reason for securing hot wallets. As they are secured with the help of PIN numbers, it can be hacked if:
- The PIN is easy to memorize.
- The mobile phone is lost and the PIN number for the mobile wallet has not been set.
- The PIN number’s keystrokes can be observed by anyone, making it susceptible to theft if the mobile phone is left unattended.
- The user carelessly mentions the details of the wallets or writes down the PIN on a piece of paper.
Such incidents expose high levels of risk to the wallets. As the possibility of human error or negligence cannot be predicted at any point in time, it is advisable to prevent storing data in hot wallets.
2. Spoofing User Address
The possibility of hacking through a lucrative scheme can be quite simple. Sweeping funds in an ICO (Initial Coin Offering) usually opens at a specified time and once requisite funds are collected, the ICO is closed.
To make it appear genuine, the collection address may also be posted on the website of the project. Once the required amount has been collected, the address is flagged as fake making it difficult to trace the hacker.
In the past, millions of dollars have been siphoned off within a few hours. Unfortunately, many investors continue to be trapped in such schemes. However, this does make it very critical for the wallets to be insured.
Read More: The Pros and Cons of Investing in an ICO
3. Damage to Devices
Any damage to the physical device can cause all the information within the wallet to be lost. If the private keys have not been carefully backed, a user’s entire cryptocurrency investment can be permanently lost.
Also, if the backup has not been carefully stored, it is susceptible to further misuse. Thus, users should consider insuring their investments as such events are unpredictable to occur.
4. Phishing and Spoofing Payment Information
Phishing is a common example of tricking users into a website which appears to be genuine when it is not. All users may not be vigilant enough, thereby making them victims when entering their password details on such duplicate websites.
Another situation can involve simple theft that can be done through money transfers. Let’s say a user is transferring money to another user. The address can be copied correctly but malware can replace the address in the clipboard with another one. Since users generally do not check the entire address especially if it contains a long jumble of characters, the probability of frauds becomes quite high in hot wallets.
Read More: Insurance Against Crypto Theft
It can be argued that traditional banks or payment systems can also run into trouble with cyber thieves. However, in those cases, there is a good chance of the transfer being cancelled which is not easy when it comes to online transfers.
5. Lack of Regulation
Perhaps one of the major drawbacks of the cryptocurrency market is the lack of regulation in most countries. Some governments do not encourage the use of cryptocurrencies thus causing a lack of risk mechanisms and no guarantee in case of any mishaps.
One only relies on the word of honor from people who have initiated the project. This cannot always be a trustworthy mechanism as the scope of fraud increases with every increase in earnings. Also, it isn’t very easy to track down and de-anonymize a payee on the cryptocurrency market. Since hot wallets are also a preferred mode of transaction, the absence of strong regulations makes it almost essential for users to insure their wallets.
Are there any Preventive Measures?
There are certain preventive measures which users can consider implementing on a regular basis:
- Maintaining a calm demeanor and making informed decisions when investing in crypto while not panicking under any situation.
- Maintaining usage of hardware wallets.
- Always verifying a web wallet’s address and not blindly following links provided anywhere.
- Performing high-quality antivirus protection scans for protecting the devices when accessing crypto-wallets, crypto-exchanges etc.
- Users should consider diversifying their investments and not put entire money in crypto since it’s traditionally a risky avenue.
Do you believe hot wallets are the best means of storage for cryptocurrencies? Or are Cold Wallets much better? Let us know in the comments section below.
Financial Analyst for JP Morgan Chase | Content Writer for eduCBA | Mentor