As I stated in my last post when I initially got in crypto in June of 2020 I only had a Kraken account. Since all of my crypto assets were only on Kraken there was not much of an issue moving money around I just had the available cash in the account and all of the coins/positions that I held in one place.

Like most exchanges Kraken does not provide a wallet service, they hold a majority of their assets in various 'hot wallets' that as a Customer you have no access to. This is very similar to a normal stock broker, where if Kraken gets hacked and loses access to the hot wallets the money could be effectively gone. This happened a few years ago at a major exchange (see Mt. Gox) which led me to evaluate other options as I accumulated more exchange accounts and long term 'cold storage' options for things I really believe in.

In pursuit of a few altcoins (i.e. anything not Bitcoin) that Kraken and Coinbase do not offer trading in, I discovered that it is quite a challenge as an American to gain access to a deep (or any, in most cases) liquidity pool for some of the smaller coins. The largest exchange currently (June 2021) is Binance but due to some legal trouble in the US does not offer accounts to Americans, we have to sign up to Binance.us which has much fewer coins than Binance itself.

This lack of altcoins through major US exchange accounts led me down a huge crypto wallet rabbit hole.

Where are the keys?

When you generate a new crypto wallet, you end up with a new public address (or way to generate addresses) and a private key which needs to remain secret. There are a variety of implementations on this idea but effectively it boils down to:

Public Key/Address + Private Key => Control of assets associated with the address

So you can see why keeping private keys safe is such a concern when it comes to crypto. Lose your private key and your control over the tokens is lost.

The private keys are not typically display in plaintext due to security concerns. When new keys are made they are generated along with a 'recovery phrase' of usually 24 words of a specific list in a certain order, which can regenerate the private keys if the wallet is lost. These recovery phrases are the weak link in the crypto wallet security chain.

Hot and Cold Wallets

Any wallet whose keys is directly exposed to the internet is considered a hot wallet. The benefits of hot wallets are mainly ease of access (e.g. have a mobile wallet on a phone used for small daily transactions) but there are obvious security drawbacks due to internet exposure.

A cold wallet does not expose it's private keys to the internet. This can come in the form of a hardware wallet (e.g. Ledger Nano X or Trezor One) or even a paper wallet if you so desire. These wallets excel at security but can be worse with ease of access to the funds.

Fiat to Crypto flow

Below is a very top level flowchart of how I have been interacting with crypto for the last few months. It doesn't really go into gas prices (cost of getting things committed to a chain) or crossing chains (e.g. taking something from Ethereum to the Binance Smart Chain) which both deserve their own posts.

You might notice the arrows between cold wallets and staking above. I currently only have Ledger hardware wallets, which support delegating a few staking coins to a third party while retaining ownership of the coins on the hardware wallet. This gives the benefits of staking while retaining the private keys, which is not the case when staking on an exchange (keys not in your control).

Software Wallets

As far as software wallets go, browser extensions are likely the most prolific. I have been using MetaMask with great success the past few weeks/months.

MetaMask

MetaMask is primarily an Ethereum chain browser extension, which can be exposed to other chains as well (e.g. Matic or Bianance/Binance Smart Chain). It can be associated with hardware wallets and provide an way to interact with dApps (decentralized apps) online using assets stored on a hardware wallet. I can use my Ledger's Ethereum address via Metamask to interact with dApps with more security than MetaMask alone. The Ledger adds an extra layer of security since the keys never leave the Ledger. If you do not have a hardware wallet MetaMask can make a wallet for you and provides the recovery phrase associated with the address.

Token Specific Wallets

In an effort to achieve passive income with crypto, I have started a few validator nodes on allnodes.com: DIVI (ROI/year of 21% currently) and Horizen (ROI/year of 9.31% currently) and a separate software wallet to stake Reddcoin. I am also staking various coins through exchanges and Ledger Live, trying to achieve enough 'mailbox money' to cover my lifestyle someday. I definitely believe in diversification so I have assets all over, everything is not in one basket.

Staking with your own wallet (and computer hardware) requires the wallet to be participating in the network as much as it can, so the computer needs to be on basically all the time. My new NAS setup is running 24/7 so I decided to spin up an Ubuntu VM to run these software wallets. Initially I was trying to run the wallets in dockers natively on the NAS but thought this would be a good time to try and be more secure and spun up a VM for exclusively Crypto wallets.

If you do not want to stake with your own wallet then a big exchange like Binance, Coinbase, or Kraken can do it for you and offer nearly the same rate of return (they usually take a small cut to offset overhead) with much less effort.

As with everything crypto, I would say the best way to learn is to try things out yourself. Start with a big exchange and then branch out into tokens/projects that interest you. I know I personally have gotten quite into crypto after learning about the impending transition to Proof-of-Stake (PoS) with ETH -> ETH2 and all of the environmental and financial benefits that PoS bring to the table.