For many new to the space, storing cryptocurrency can be a daunting task. Unlike with a bank account or investments made through a traditional financial firm, storing crypto is solely the responsibility of an individual, and if careless, can be lost, or stolen.
This blog post will focus on the well known methods of storing cryptocurrency.
Cryptocurrency are stored in wallets. These wallets store your private keys- the passwords that allow you to access and transfer your cryptocurrencies- safe and accessible. They come in various forms, outlined below:
Custodial wallets are wallets hosted by a third-party provider, such as a cryptocurrency exchange, who store crypto on your behalf. Whenever one purchases cryptocurrency on a major exchange, such as Binance or Coinbase, these exchanges will store your cryptocurrency for you in a custodial wallet, until you move it off of their platform.
Custodial wallets are the simplest and most convenient option for many who are new to the cryptocurrency space. If one forgets their password or private keys, they can simply contact the third party who hosts the custodial wallet in order to regain access.
However, custodial wallets come with certain drawbacks. As an individual, you are entrusting your cryptocurrency to a third party, who could themselves fall victim to a hack resulting in the theft of your cryptocurrency. While most major exchanges have excellent security measures in place, thefts have occurred, with Bitfinex losing 119,756 Bitcoin in a hack back in 2016, equivalent to £3.7 billion in today’s money.
Unlike custodial wallets, cold wallets do not rely on live third parties to safeguard your cryptocurrency. All cryptocurrency stored in cold wallets is stored offline, typically in small external devices known as hardware wallets, which can be inserted into a computer in order to be accessed. Each hardware wallet can store multiple types of cryptocurrency and comes with a recovery phrase, so that if ever you lose the device itself you can regain access to your cryptocurrency through a new, separate device.
Although widely considered to be the best option for storing cryptocurrency from a security perspective, managing offline wallets come with additional responsibilities. If ever you were to misplace your recovery phrase or private keys, you would permanently lose access to your cryptocurrency.
Hot wallets are similar to custodian wallets, given that they store cryptocurrencies online. They are typically available through third party applications or mobile apps, are free, and often come with an easy to use UI, ideal for those new to the space. Like hardware wallets, hot wallets can be accessed through a private recovery phrase, if ever the application is deleted. However as with custodial wallets, given the fact that hot wallets are online, they are at risk of hacks by malicious third parties.
Once you have selected the type of wallet in which you wish to store your cryptocurrency, there are multiple safe practices that can be adhered to, to ensure they are stored securely:
Never share your cryptocurrency private keys or recovery phrase with anyone and keep them offline.
Keep your private keys or recovery phrase in the most secure location you know.
Keep paper copies of your private keys.
Store larger sums of cryptocurrencies on hardware/cold wallets rather than hot wallets, as they are the most secure wallets in the market.
Enabling two factor/SMS and email authentication on any hot or custodian wallets.
Always be sure to verify all correspondence with any exchange/hot wallet provider to prevent against phishing scams.
Following these practices can help to mitigate against careless error or theft of one’s cryptocurrency.
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