Cryptocurrency wallets come in two different forms. The two forms are called custodial wallets, and non-custodial wallets. Custodial wallets are like your bank account. You give a company, or third party access to your funds, and they keep it safe for you. Non-Custodial wallets are like the safe that you keep in your house. You have the only key to the safe, and you are entirely responsible for keeping the money you have in your safe, safe.
By: Keegan Francis | May 28, 2020 | Modified May 28, 2020
Custodial wallets are like bank accounts, the third party you’ve decided to deposit your cryptocurrency with is responsible for keeping your money safe. This means that you cannot directly back up your wallet, as you don’t have direct access to your cryptocurrency. It does however mean that you can take certain precautionary measures in order to safeguard yourself against hackers.
A strong password is not the name of your first dog spelled backwards. It’s also not the same password that you use for your email account. A strong password contains uppercase and lowercase letters, multiple numbers, and at least one symbol such as ‘%’ or ‘&’. Hackers use sophisticated password guessers to try millions of passwords, until they get the right one. By creating a diverse password that is also more than 8 characters long, you make sure your password cannot be hacked through “brute force”. The best password is actually just random letters, numbers, and symbols. You can’t possibly be expected to remember this though, this is what a password manager like Bitwarden is for.
Two factor authentication (2FA) simply means that you need to take two actions before gaining access to your account. This means that even if a hacker were to guess your password, they would also need access to your phone or email address. Think of two factor authentication as a second layer of security that protects your account. Most custodial wallets offer 2FA, as it has become a standard security practice, and in many cases, a requirement.
Non-Custodial Wallets are like the safe you keep in your house. You have the only key, and you should take every measure you can in order to keep that key safe. With cryptocurrency, if you lose that key, then it is impossible for you to regain access to your cryptocurrency. While this fact is unsettling for some people, it is also the foundation on which true ownership is built upon. Losing access to your keys is detrimental, luckily this guide will teach you how to easily backup your non-custodial wallet.
The reason why cryptocurrency is so secure, is because the keys that you use to access your money are very large, and random. Most non-custodial wallets come built in with the ability to “backup” your wallet. Upon backing up your wallet, you will be prompted to copy down either 12, or 24 words. These words are selected at random from a dictionary. To put in simply, these words represent your key. The words are basically an alternative way or representing a large, and random number. It is nearly impossible to guess the same 12 or 24 words that you were given upon backing up your wallet. Copy this phrase down onto a piece of paper, or store the phrase in a .txt file and put in on a USB stick.
The other way to protect your funds is a little more complicated, and only recommended for advanced users. At the end of the day, your recovery phrase is like a “Master Backup” of your cryptocurrency wallet. That same phrase can be used to generate a vast multitude of addresses and private keys. For example, when using bitcoin, most wallets won’t use the same public address twice. Every time you receive more bitcoin, a new bitcoin address will be generated. If you wanted to, you could copy each and every private key, that corresponds to your public addresses. This is unnecessary in most situations because your recovery phrase can be used to re-generate your private keys. However, there are some situations where you may want to have a hard copy of the private key.
Whether you choose to backup all of your private keys, or simply just your recovery phrase, it is important that you copy, and distribute the backups. Your goal is to protect yourself from a range of unfortunate situations such as your house burning down, or your untimely death. You do not want your family to lose access to your legacy, in the event that you’re not around to tell them how to access your cryptocurrency. Choose either paper, or a USB stick. Put your backup (phrase or private keys) on the piece of paper, or USB stick. Do this at least twice. Keep on copy in a fireproof safe or a vault such as a safety deposit box. Keep the other copy in a secondary location that you trust. The lawyer that you trust with your estate is a good example of someone you would keep a backup with. In the event of your untimely death, it is important that someone both knows where your backups are, and how to access them.
No matter which wallet you’re using, they all needed to be built with the same cryptography in mind. This is convenient because it means that the process of backing up, and eventually recovering your funds is basically the same from wallet to wallet. Some wallets make this process extremely simple because they’ve built very user friendly interfaces that take out any complicated aspects to the backup process. We recommend the Exodus wallet. This fact is also quite nice for you because it means that you can switch wallets at any point and time. If you don’t like the wallet you’re using, simply use your recovery phrase to import your funds to your new wallet. You can even go from a software based wallet to a hardware based wallet like the Ledger Nano X.