13 Things to Avoid When Setting Up a Crypto Wallet

Table of Contents

• Introduction
• 1. Choosing an Unreliable Cryptocurrency Exchange
• 2. Not Enabling Two-Factor Authentication
• 3. Failing to Backup Your Recovery Phrase
• 4. Saving Your Private Keys Online
• 5. Not Testing Recovery Before Depositing Funds
• 6. Sending Funds Directly to a Market Address
• 7. Falling Victim to Giveaway Scams
• 8. Choosing Weak or Reused Passwords
• 9. Saving Wallet Keys on a Shared, Internet-Connected Device
• 10. Failing to Keep Software Updated
• 11. Not Paying Transaction Fees When Required
• 12. Confusing Network Compatibility When Transferring Assets
• 13. Losing Your Recovery Phrase and Keys
• Conclusion and Summary

Introduction

Cryptocurrency wallets are essential for securely storing digital assets and completing transactions on various blockchain networks. However, setting up a crypto wallet properly is critical in order to keep your funds safe from hackers, scammers, and potential user errors. With crypto being an emerging technology, it's easy to make mistakes when creating a new wallet that could put your holdings at risk.

This guide will overview 13 common pitfalls people encounter when setting up cryptocurrency wallets and how to avoid them. Following these tips will help you configure your wallet securely so you can feel confident storing crypto safely for the long-term. We'll also recap alternatives for backing up your credentials to prevent irretrievable losses.

1. Choosing an Unreliable Cryptocurrency Exchange

Cryptocurrency exchanges like Coinbase and Gemini allow you to easily buy crypto with fiat currency, store holdings online, trade assets, and withdraw to external wallets. When first acquiring digital currencies, many beginners simply use the wallet provided on whichever exchange they register with.

However, difficulties arise when exchanges suspend withdrawals due to technical issues, go bankrupt, suffer hacks, or commit fraud. If an exchange's security is compromised, customer crypto assets are at risk.

You should only use large, reputable exchanges that implement robust security measures and insurance protections. Avoid lesser-known platforms, particularly if they don't require extensive identity verification (KYC) from users. Reputable platforms like Coinbase and Gemini have strong track records for security and liquidity.

Pros of Major Exchanges	Cons of Minor Exchanges
Extensive security protections	Lack sufficient safeguards
Established track records	Higher fraud/hack risk
Full customer verifications	Minimal KYC requirements
Robust liquidity	Liquidity issues
Insurance for assets	No asset insurance offered

In general, it's safest to purchase crypto from well-established exchanges and then withdraw to your own private wallet (which we'll discuss next). Don't solely rely on exchange-hosted wallets to store holdings long-term.

2. Not Enabling Two-Factor Authentication

Two-factor authentication (2FA) adds an extra layer of security beyond your password when accessing accounts and wallets by requiring a secondary one-time code. Without 2FA enabled, hackers with compromised passwords can easily access accounts.

All reputable exchanges and wallets support setting up two-factor authentication:

• SMS/Text message: Enter code texted to your phone
• Authenticator app: Scan QR code and input codes from an app like Google Authenticator
• Security key: Insert a physical YubiKey device

The most secure method is using a security key, followed by an authenticator app. Both options will provide one-time codes even without mobile service. You should enable 2FA using security keys or apps for the following:

• Cryptocurrency exchange accounts
• Hosted web wallets
• Email accounts
• Password manager

With 2FA configured, if your login credentials are ever compromised, hackers still cannot access accounts or withdraw funds without also obtaining your telephone or authenticator device. Just ensure you don't lose access to those!

3. Failing to Backup Your Recovery Phrase

When initially setting up cryptocurrency wallets, you are provided with a randomly generated recovery phrase (also called a seed phrase, mnemonic phrase, or backup phrase). This consists of 12-24 words in a set order allowing restoration of the wallet.

It is absolutely critical to save this recovery phrase when you first set up your crypto wallet and store it somewhere secure. As a reminder, here's what could happen if you fail to properly backup your wallet's recovery phrase:

• Lose phone/device holding your wallet - all funds gone forever
• Device holding wallet destroyed/damaged - all funds gone forever
• Death without sharing credential inheritance plan - all funds gone forever for heirs
• Forget your PIN or password many years later - all funds frozen forever

As you can imagine, not having access to the recovery phrase could mean the permanent loss of your cryptocurrency holdings. That's why it's so important to carefully write down or safely store your recovery phrase when you first create your crypto wallet.

Do not save digital copies on your computer or upload photos to the internet for backup.

Instead, store the recovery phrase offline using one of the following methods:

• Handwritten paper kept secure in multiple locations
• Engraved/stamped metal plates locked in safe deposit boxes

By securely backing up your wallet's recovery credentials offline, you ensure you can always regain access even if you lose access to your wallet itself. Just don't store the recovery phrase anywhere that could be compromised by theft, hackers, or accidents!

4. Saving Your Private Keys Online

Every cryptocurrency wallet also has one or more unique private keys - long alphanumeric access codes that prove ownership allowing transfers of assets. Private keys provide the highest level control, similar to bank account numbers and routing numbers combined.

While your public wallet address can be freely shared to receive crypto payments, private keys should remain utterly confidential. Having possession of someone's private keys is akin to controlling their bank account - meaning the ability to withdraw everything.

Unfortunately, some people mistakenly upload or save digital copies of wallet private keys using cloud storage platforms or password manager apps thinking this serves as an accessible backup. However, storing private keys online leaves them vulnerable to the following threats:

• Password database hacks
• Cloud storage data breaches
• Keylogging or spyware capturing keys
• Website vulnerabilities exposing data

If any private key backups are accessed digitally by hackers or malware, they could immediately drain wallets. For maximum security, cryptocurrency private keys should never be stored anywhere online. Instead, they should be kept in the same ultra-secure, offline manner outlined for recovery phrases earlier.

By exclusively maintaining private keys offline using physical backups, you remove all risk of digital theft or exposure. Just take care not to damage, misplace, or lose track of these critical backups!

5. Not Testing Recovery Before Depositing Funds

Before transferring any substantial real-world value into your cryptocurrency wallet, it's critically important to confirm that the recovery process works properly by restoring access on a separate device. Don't assume credentials saved months or years ago will remain perfectly reliable for recovery.

Here is a quick overview of best practices for pre-deposit wallet recovery testing:

1. Save new wallet recovery phrase safely on paper when first creating wallet
2. Delete original wallet app and any record of original password/PIN
3. Install wallet app on a separate, freshly reset device
4. Carefully enter backed-up recovery phrase to restore access
5. Verify wallet address matches and can generate receive addresses

If the restoration process completes smoothly and you regain wallet functionality, recovery appears reliable. However, if you encounter any errors or issues restoring with your recovery phrase, resolve them before depositing funds into the wallet. Loss of access could otherwise mean permanently frozen assets.

Only after confirming your recovery phrase or backup process succeeds by restoring seamlessly on a separate device should you feel comfortable depositing crypto into new wallets. Don't skip this critical step!

6. Sending Funds Directly to a Market Address

Cryptocurrency exchanges generate special market wallet addresses for each customer used when depositing funds to trade or withdraw later. However, some exchanges also provide users unique personal wallet addresses for receiving payments externally.

It's important to recognize the difference between these two address types. If another person mistakenly sends funds directly to your exchange market address instead of your personal address, there could be numerous issues:

• Mismatch between name and address
• Need to provide extensive account records
• Outside deposits not allowed, resulting in account suspension
• Risk of permanent asset freeze or loss

Always use personal wallet addresses for peer-to-peer transfers or external deposits. Triple check any address before initiating transfers. If someone else accidentally deposits to your market wallet address, quickly contact exchange support to request recovery.

Following this recommendation protects against headaches related to misdirected payments. Be very careful when copying any wallet addresses involving an exchange.

7. Falling Victim to Giveaway Scams

As cryptocurrency has exploded in popularity in recent years, there has been a parallel surge in scams duping newcomers. One tactic seen frequently is fake "giveaways" promoted online or via direct messaging:

"Send 0.1 BTC to wallet ABC and receive 1 full BTC back!"

These are essentially variations of the age-old "advance fee" gambit - promising greater returns later to bait victims into an upfront payment. No legitimate giveaways would ever demand custody of your cryptocurrency, recovery phrase, or private keys before sending rewards.

Here are some telltale signs a crypto giveaway offer is a total scam:

• Requiring upfront payment to participate
• Requests for personal wallet details or credentials
• Pressure to act quickly before the offer expires
• Account usernames mimicking celebrities or brands

The scammers simply collect credentials or deposits from victims without any intent to return promised payments. You should never, under any circumstances, provide your recovery phrase, private keys, account details, or wallet information to receive a "giveaway" offer or "help" from random social media users.

Doing so guarantees loss of funds as accounts get drained. If something appears suspiciously too good to be true in crypto, it almost always is. Stick to legitimate wallet and exchange providers you trust 100%.

8. Choosing Weak or Reused Passwords

Given the irreversible and semi-anonymous nature of cryptocurrency transactions, having a strong, unique password for every related service is truly critical. If your exchange account, hosted wallet, or email login has a poor, reused password that gets compromised, hackers can fully takeover accounts and drain funds rapidly.

Some tips for ensuring password security across your crypto accounts, apps, and email:

• Use a password manager like LastPass or 1Password to generate and store strong, random passwords for each account
• Always make passwords 12+ characters combining upper and lowercase letters, numbers, and symbols
• Never reuse the same password across different accounts or services
• Enable two-factor authentication (2FA) as an added layer beyond just passwords

By taking advantage of long, randomly generated passwords uniquely for every crypto service, you make it nearly impossible for hackers that obtain one password to then access your other accounts. This simple practice meaningfully reduces susceptibility to many types of cryptographic account hijacking.

9. Saving Wallet Keys on a Shared, Internet-Connected Device

For those looking to enhance security beyond software or web-based wallets, one option gaining popularity is hardware wallets - specially designed offline devices with crypto key storage. However, some users try retaining online convenience by saving wallet keys or credentials on easily accessible, internet-connected drives:

• Shared home computers
• Mobile phones
• Cloud storage drives

The problem arises when any internet-linked devices used by multiple people or connecting to public networks can potentially transmit files to hackers. Whether via spyware, viruses, wifi sniffing, or remote desktop exploits - saved cryptocurrency wallet keys and recovery phrases can be secretly snatched from common devices by online threats.

This is why experts overwhelmingly recommend keeping all cryptocurrency credentials stored fully offline without any website, cloud service, mobile app, or commonly shared computer access. Use water/fire-proof hardware backups stored securely along with dedicated offline hardware wallets whenever possible.

Air gaps from the internet provide vastly better protection for sensitive wallet keys and recovery phrases than casual mixed usage devices likely riddled with malware and remote access vulnerabilities. Make sure storage practices match the value at risk.

10. Failing to Keep Software Updated

As cryptocurrency wallet developers are always trying to stay ahead of emerging threats and hackers, they periodically release crucial software updates improving functionality and security. However, many users neglect keeping apps on their devices updated properly over longer durations.

The vulnerabilities of outdated programs are then actively exploited by hackers devising intrusion methods. They target users sticking with antique wallet software versions full of holes patched long ago in newer releases. Just like aging homes, infrastructure, or vehicles, outdated technology inherently breaks down.

You should aim to promptly update the following anytime major new versions arise:

• Cryptocurrency wallet apps
• Operating systems on devices holding crypto
• Anti-virus/malware software
• Browsers used to access related services
• Two-factor authentication apps
• Password manager software

By regularly updating programs tied to cryptocurrency usage whenever fresh releases emerge, you filter out many outdated points of entry for hackers. Don't reuse the same old versions indefinitely without paying attention to improvement updates!

11. Not Paying Transaction Fees When Required

Sending cryptocurrency transactions across decentralized blockchain networks involves minimal fees paid to validators/miners confirming payments. However, some beginners first funding wallets neglect setting proper transaction fees.

Without adequate fees, crypto transactions may hang perpetually in limbo without enough incentive for validators to process them in crowded mempools. Different currencies and market conditions require varying appropriate fees for timely confirmation:

Cryptocurrency	Sample Fee Range
Bitcoin	$0.50 - $5+
Ethereum	Less than $1 to $75+ during clogs
Litecoin	$0.01 to $2

When making any transfers, check current network conditions and intentionally include an appropriate fee using wallet settings, exchanges, or crypto services. Leaving it set to near-zero by default can stall payments for hours or even weeks during high activity. Don't learn this lesson the hard way!

12. Confusing Network Compatibility When Transferring Assets

With an increasing array of cryptocurrencies using bandwagon buzzwords and ticker symbols, it's easy for beginners to mix up intended destinations when moving funds between wallets or exchanges.

You must always verify precise wallet/network compatibility of the crypto asset intended for transfer BEFORE submitting it. For example:

• Sending Bitcoin Cash to a Bitcoin wallet
• Transferring Ethereum ERC-20 tokens to an Ethereum Classic address
• Swapping USDC stablecoin with USDT or BUSD coins

Double and triple checking that "Send" and "Receive" cryptocurrency types match could save you from permanent losses. Tokens from one blockchain network arriving to incompatible wallet infrastructure often cannot be recovered once broadcast. Heed this advance warning carefully!

13. Losing Your Recovery Phrase and Keys

Now that previous tips have hopefully sunk in regarding safe backup procedures for cryptocurrency credentials stored offline using ultra-secure protocols, it may seem redundant to warn once again about losing access to private keys and recovery phrases.

But the fact remains: whether by hardware failure, natural disaster, early Bitcoin pioneer misfortune ("$250M Under the Sea"), or descendants ignorantly discarding undiscovered safe deposit boxes decades later (or panic selling 100 BTC for $15 in 2010 because the laptop holding the keys crashed) - losing cryptocurrency credentials equals losing funds forever.

No master administrator key exists for restoring access to crypto controlled by your unique keys and recovery phrases. The immutable distributed ledger permanently records those funds changed hands.

Treat the sensitive backup details granting ability to sign irreversible blockchain transactions with the utmost care. Duplicate them across multiple safe sites with well-communicated inheritance instructions among trusted relations. Oversight regarding cryptocurrency keys and recovery phrases persistently proves very pricey.

Conclusion and Summary

In summary, here are concise conclusions reinforcing the most crucial guidelines for risk prevention when creating new cryptocurrency wallets:

• Only utilize exchanges knowing you later plan to withdraw assets to private wallets you control. Don't casually keep large amounts on platforms long term
• Enable 2FA using multiple methods for enhanced account security on all exchanges, wallets, email, and password manager
• Very carefully handle wallet recovery phrase backups during initial creation, properly securing multiple copies in private, offline, geographically distributed vaults
• Never digitally store or transmit unencrypted private keys anywhere online; deeply understand consequences
• Test recovery processes restore seamlessly before depositing substantial assets
• Learn precise differences between personal wallet addresses and market exchange deposit addresses to prevent costly mix-ups
• Ignore scammy crypto giveaways, especially any demanding immediate payment or sensitive credential access
• Randomly generate passwords using reputable password managers rather than weaker human derived variants across accounts
• Always run fully updated wallet software, operating systems, antivirus, and second-factor authentication apps through auto-notifications
• Check suggested fee rates before sending transactions or risk payments stalling indefinitely during network congestion
• Slow down and verify precise cryptocurrency types being transacted from start to finish before confirming irreversible transfers
• Backup credentials exceed expectations; imagine explaining to future generations losing keys to fortune

Carefully avoid these common cryptocurrency security mishaps, and you'll be on your way to storing digital assets safely for years. Just take things slowly, double-check everything, and overprepare contingency plans using properly guarded recovery credentials. What might appear like paranoid protection measures today could save you immeasurable headaches tomorrow!