The best way to store cryptocurrency safely. Image credit: Supplied
When new users are first learning how to invest in cryptocurrency, there are several obvious recommendations that can be made. Never invest more than you can comfortably afford to lose, for example – and never disclose to anyone that you hold cryptocurrencies.
This guide is designed to educate newcomers on the best way to store cryptocurrency, and the other things you can do with crypto once you’ve bought it. Depending on the way the cryptocurrency is intended to be used, the type of wallet recommended might change. In the end, the advice is the same no matter how assets are stored: safety must come first.
In simple terms, a cryptocurrency wallet is a way to interact with the blockchain using a private key to store, send, or receive crypto assets such as Bitcoin, Ethereum, and ERC-20 tokens.
Beyond that simple explanation, things become more convoluted. There are “hot” and “cold” wallets that both have potential to leave you burned in some way, but can also be an enormous benefit and a must when using crypto.
Each cryptocurrency also often requires its own separate wallet, or unique wallet address. Multi-asset wallets do exist, however, and ERC-20 tokens, for example, can be sent or stored at any Ethereum address.
Sending one type of cryptocurrency asset to the wrong address type typically results in the coins being lost forever, which makes understanding how to use a crypto wallet vital to safely navigating the crypto market.
With all of these facts in mind, the next step is to determine if the crypto assets are meant for long or short-term storage. Many new investors who don’t yet have the skills to manage positions and don’t know how to use crypto wallets reliably are often advised to hold their assets for the long-term in a cold storage wallet.
Savvy investors who either have more talent or experience in markets might prefer to keep their crypto in a hot wallet so that they can have faster access to their funds for trading or spending. Hot wallets are wallets that are connected to the internet at all times putting them at greater risk of intrusion by cyber criminals.
Hot and cold storage wallets both have a place for crypto investors and both have their unique benefits. How you plan to use crypto should dictate which type of wallet you choose.
The first type of wallet we’ll explain is the cold storage wallet. Cold storage wallets are often called hardware wallets, and are usually USB or bluetooth devices that store a crypto wallet’s private key behind a secure element.
Cold storage wallets are highly recommended for long-term storage of assets, especially large sums of crypto assets. This type of cryptocurrency wallet is referred to as self custody, and allows individuals to be their own bank and store value, even sending it from one user to another without the need for a third-party intermediary.
Common cold storage wallet brands include Trezor and Ledger, however, not even cold storage wallets are 100% safe at all times. For example, these devices are heavily faked so getting one from a genuine supplier is critical to safety. If the device comes with the passphrase already included, don’t use it, it could be a scam.
There was even a situation where Ledger suffered a data breach and user’s personal and private addresses were leaked online. Criminals have begun using these addresses to send phony replacement devices to dupe investors. As you can see, no type of crypto wallet is perfectly safe.
Hot wallets are most commonly wallets accessed via a smartphone app, web browser, or desktop client. This type of wallet also includes cryptocurrency exchanges and trading platforms which utilize centralized systems.
Years ago, cryptocurrency exchanges were hacked regularly which prompted many platforms to increase security. In Japan, for example, where the hacks were in abundance, many exchanges were shut down by the FSA until operations improved. This has resulted in safer security across the industry, but there is still risk associated with hot wallets.
Hot wallets on centralized systems can lead to funds being seized by the government, or potentially lost as part of an insolvency or exit scam. For example, the coins on the Mt. Gox crypto exchange are still locked up to this day due to legal proceedings.
It is for these reasons the saying “not your keys, not your coins” was developed. It is a reminder that for any wallet where the user doesn’t retain their private keys and another party does, the other party could prevent the owner of the funds from accessing the money for whatever reason they deem acceptable. Crypto assets on a cold storage wallet cannot be seized in this way.
Hybrid systems have also been developed which have achieved a much lower rate of security risk. For example, PrimeXBT relies on a cold storage solution for storing funds, rather than the normal hot wallet system most trading platforms use. This results in a once per 24 hour period requirement on withdrawals, however, it also keeps user’s funds protected at all times. Using this system, the platform has never experienced a hack and no client funds have ever been lost.
Such hybrid systems offer the safety of cold storage with the simplicity of hot wallets. Which wallet solution is right for you, again, comes down to the individual and the situation. For the long-term investor seeking to avoid short-term capital gains tax, for example, cold storage is better for long term storage. But if someone wants to trade their coins for a profit and get the most out of their crypto, they might need to rely on a hot wallet or hope their platform offers one of the newer hybrid solutions. Take a look at Quantum Code.