Investors usually use one wallet in real life. These days, people often do not carry cash, so they may only carry a card wallet. However, in the world of virtual assets, there are various types of wallets. If you are a beginner in virtual asset investment, you only need to understand the exchange wallet, but it is important to know why a personal wallet is necessary and what a cold wallet is. As the scale of virtual asset transactions increases, the likelihood of using at least a personal wallet also increases.
Most virtual asset investors currently use only exchange wallets. In South Korea, after signing up for exchanges such as Bithumb and Upbit, users link their accounts with KB Kookmin Bank or Kbank. Then, it is common to deposit Korean won into a virtual asset exchange and use that money to conduct virtual asset transactions. At this time, what investors use is the exchange wallet provided by the exchanges.
◇ Exchange wallet, hacking and moral hazard risks
In fact, buying and selling virtual assets on centralized exchanges like Upbit or Bithumb is just a ledger transaction that occurs within each exchange. The actual transfer of virtual assets on the blockchain does not happen. Real blockchain transactions occur only when you request a withdrawal to your personal wallet. Virtual asset exchanges manage and store the cash in your name and the virtual assets purchased and sold on the ledger through that cash.
Because of this, there is a saying that if virtual assets are not in personal wallets, "they are practically not your money." In reality, whether you keep your assets in an exchange wallet or a personal wallet, it does not present a major issue during normal times. However, if an exchange goes bankrupt or is hacked by a hacker and all assets disappear, investors will not be able to defend themselves and will lose all their assets. This is not an unheard-of scenario; there have indeed been several such cases.
In 2014, the world's largest exchange, Mt. Gox, went bankrupt due to hacking. Based in Japan, Mt. Gox suffered massive hacking damage and had about 850,000 Bitcoins stolen. Of these, about 750,000 Bitcoins belonged to customers, who lost all their assets overnight.
The danger of exchange wallets is not only due to hacking. In 2022, the world's third-largest virtual asset exchange, FTX, went bankrupt and is still undergoing bankruptcy proceedings while gradually repaying affected customers' assets. The reason for FTX's bankruptcy is that it was found to have misappropriated funds and mishandled customers' assets improperly. The FTX incident was a financial fraud that set a record for the largest scale of virtual asset damage and plunged the entire market into a recession. The "GoFi incident," which has continued to cause conflict domestically, is also a consequence of FTX's bankruptcy.
◇ Personal wallet for managing virtual assets directly
During the FTX incident, some customers managed to reduce their losses by using personal wallets. Before FTX's bankruptcy, signals of insufficient liquidity at the exchange and the potential for bankruptcy spread rapidly among investors, leading proactive investors to transfer their virtual assets from the FTX exchange wallet to personal wallets. Just as a bank run occurs in financial institutions, a bank run occurred at FTX as well. However, investors who had no knowledge of personal wallets and had not created them could only watch helplessly.
In this way, personal wallets allow individuals to manage their virtual assets directly, as opposed to exchange wallets, and provide a service for transferring them to others. The most widely known personal wallet service is MetaMask, which is based on the Ethereum blockchain. MetaMask supports only Ethereum-based virtual assets and a few compatible blockchains, so it can only store Ethereum, Polygon, Avalanche, etc. Therefore, various wallets exist, like Phantom based on the Solana chain and Keplr based on the Cosmos chain, and investors can select wallets to store their assets.
Finally, to use a personal wallet directly, you need to know the "wallet address" that serves as the bank account number and the "private key" that acts as the password. To send or receive virtual assets to someone, you need to know your wallet address, and just as you enter a password when using cash in your bank account, the password to move assets from your personal wallet is called a private key. Wallet addresses and private keys may differ slightly by wallet type, but for Bitcoin and Ethereum, they consist of 64 characters and numbers.
Yun Seung-sik, a researcher at Tiger Research, said, "Centralized exchanges are convenient but have structural limitations that can risk investors' assets in case of hacking or exchange bankruptcy,” and added, "Especially considering that, as seen in the FTX incident, no matter how large an exchange is, it can go bankrupt, it is advisable for investors to diversify a portion of their assets by keeping the private key themselves in self-custody wallets (personal wallets)."