Cryptocurrency is an exciting new digital asset class that has grown in popularity and value over the years. It offers a new way to store and transfer money without traditional banking — but it also brings a lot of new questions. One of the most important is: how and where should I store my crypto assets?
The answer to this question is not as simple as it may seem. Storing your cryptocurrency in the wrong place could mean losing access to your funds, having them stolen, or simply being unable to make transactions.
Today, we’ll take a look at the different types of crypto storage options available and when each is best used.
A cryptocurrency wallet is a digital storage system that allows you to store and manage your cryptocurrencies. It allows you to send and receive digital assets, as well as track your balance and view transaction history.
Each wallet has its own unique address (or public key), which is used to identify the wallet when sending or receiving funds. This address is usually a series of random letters and numbers, which can be shared with others in order to receive cryptocurrency.
There is also a private key associated with each wallet, which is used to authenticate and access the funds stored in the wallet. It is important to keep this key safe and secure as it provides full access to your wallet and its contents. For example, the public address is like a bank account number and the private key is like a PIN number.
Interestingly, crypto is not stored inside the crypto wallet — it is actually stored on the blockchain, with the wallet simply providing access to it.
Crypto wallets can be divided into two categories: hot storage and cold storage.
A hot wallet is a digital wallet that is connected to the internet. As such, it is convenient to use, allowing users to quickly access their funds whenever needed.
Examples of hot crypto storage:
Hot wallets store and encrypt private keys on the app itself, which is constantly connected to the internet. As such, a hacker could use a variety of methods, such as phishing or malware, to gain access to your private keys and steal your coins. This is why it is generally recommended to only use hot wallets for small amounts of crypto (e.g. funds you plan to use in the near future).
Cold crypto wallets store the private keys offline, meaning they are not connected to the internet and thus are less vulnerable to hacking. While slightly more cumbersome than hot wallets, they provide greater security for the long-term storage of larger amounts of cryptocurrency.
Examples of cold crypto storage:
A paper wallet is a physical form of cold storage. It consists of two parts — a public address and a private key, printed out on paper (or another material such as metal).
These can be used to store cryptocurrency in an offline environment, away from the risks posed by online hackers. To access your funds, you simply scan the printed private key (also known as a seed phrase) using a wallet app (e.g. Trust Wallet).
While paper wallets are relatively secure, users must be aware of the risks posed by their physical nature — such as loss or theft. Thousands of Bitcoin (BTC) have been lost due to misplaced paper wallets.
A hardware wallet is a physical device designed to store and manage cryptocurrency keys. It also stores private keys offline, protecting them from malicious attacks and hacking attempts. In fact, transactions can only be processed by pressing a button on the device itself.
Hardware wallets are the most secure form of crypto storage and are generally recommended for users looking to store larger amounts over extended periods. Examples include Ledger Nano S, Trezor, and KeepKey.
Alongside the distinction between hot and cold wallets, it is also important to understand the difference between custodial and non-custodial wallets.
A custodial wallet (also known as a hosted wallet) is one that stores the user’s private keys on a third-party server. For example, an exchange-based wallet is a custodial wallet, as the exchange holds users’ private keys on its own servers.
Custodial wallets are more accessible than non-custodial ones since users do not have to manage their own private keys. However, this also means that security rests in the hands of the third party, making them more vulnerable to hacks and other malicious attacks.
As such, users will need to trust that the service provider is secure and reliable before using a custodial wallet. For example, exchanges should use strict security measures, such as two-factor authentication, email verification, and face/fingerprint identification, to ensure the safety of user funds.
A non-custodial wallet (also known as a self-hosted or decentralized wallet) provides the user with full control of private keys and funds. The user themselves is responsible for maintaining the security of their funds, as there is no third-party server to store private keys.
Examples of non-custodial wallets include software wallets (e.g. Exodus), hardware wallets (e.g. Ledger Nano S), and paper wallets. This type of wallet is generally more secure than custodial wallets, but users must take extra precautions to ensure their private keys are not compromised.
When first creating a non-custodial wallet, users will be required to write down 12-24 seed words, which can be used to recover the wallet if lost or stolen. It is therefore essential that users store these words in a secure place such as a safety deposit box or encrypted drive.
No matter which type of wallet you choose, it is imperative to take the necessary steps to keep your private keys safe and secure. Here are some best security practices that you should always follow:
The best way to store cryptocurrency is to use a combination of both hot and cold wallets, depending on the type and amount of funds involved. Hot wallets are best for smaller amounts and frequent transactions, while cold storage should be used to store larger amounts over extended periods.
Additionally, non-custodial wallets offer more security than custodial ones as they give users full control of their private keys. Nonetheless, it is important to always follow best security practices to prevent stolen private keys and keep your funds safe.
In conclusion, by understanding the differences between hot and cold wallets, custodial vs. non-custodial wallets, and the importance of secure storage, you can take the necessary steps to protect your cryptocurrency investments.