What’s in Your (Digital) Wallet?

February 18, 2021 By Rasti Nikolic | Associate Financial Planner
Smart phone tethered to traditional wallet. West Financial Services, Inc.

If you want to own Bitcoins or any other cryptocurrency, you need to have a digital wallet. The purpose of a digital wallet is to provide a space to send and receive cryptocurrency and to store private keys. Private keys are known only to the owner and are needed to authorize transfers. In the cryptocurrency system, a user’s “wallet” or account address has a public key (like a bank account number). The private key (like your ATM PIN number) is known only to the owner and is used to sign transactions. 

As a result, users should carefully select the type of wallet, as well as who has access and how to keep it secure. Many people use a combination of wallets. Types of digital wallets include: 

  1. Mobile wallets – popular among those who often use or exchange cryptocurrencies (examples include Mycelium and Xapo). As the name suggests, these wallets can be installed on your phone. However, if your phone is lost, stolen, or hacked, security may be compromised.
  2. Desktop wallets – PC software that stores private keys on a computer (example is Electrum). Desktop wallets are generally more secure, as long as the computer has strong virus protection.
  3. Hardware wallets – store private keys on an external storage device, such as a USB (like Ledger Nano S and Trezor). The private key is stored offline and is less likely to be hacked.
  4. Paper wallets – private keys are printed on paper, which is then stored in a bank safety deposit box, a home safe, or similar secure locations. 

Cryptocurrency exchanges, as a digital currency exchange, are websites that allow users to exchange traditional fiat currency for cryptocurrency for a fee (like Guarda and Exodus). Many of these include wallet features, although they are not a digital wallet. Despite the high levels of security associated with cryptocurrencies, there have been multiple instances of these exchanges being hacked and users losing access to their wallets.

For security purposes, most people have a dedicated email address for cryptocurrencies. They also change their password often and never reuse an existing password. Users generally should not connect to a public WiFi, which can increase the possibility of someone monitoring your activity and exchanging data. Keep your connection secure by using trusted sources of WiFi.

Best practices suggest that you have documentation regarding the type of cryptocurrency you have and maintain a list of beneficiaries who can help manage your cryptocurrency in an emergency situation or if you become incapacitated. A memorandum to your will and power of attorney is an option that is typically not part of the public record and can include a list of usernames, passwords, private keys, PINs, and similar information to access your cryptocurrency. This memorandum should be updated on a regular basis and secured. 

We recommend consulting an estate planning attorney for help in organizing and planning for all digital assets and particularly cryptocurrencies.

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West Financial Services, Inc. (“WFS”) offers investment advisory services and is registered with the U.S. Securities and Exchange Commission (“SEC”). SEC registration does not constitute an endorsement of the firm by the SEC nor does it indicate that the firm has attained a particular level of skill or ability. You should carefully read and review all information provided by WFS, including Form ADV Part 1A, Part 2A brochure and all supplements, and Form CRS.

Certain information contained herein was derived from third party sources, as indicated, and has not been independently verified. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any information presented. Where such sources include opinions and projections, such opinions and projections should be ascribed only to the applicable third party source and not to WFS.

This information is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept. These materials are not intended as any form of substitute for individualized investment advice.