What is the Safest Way to Store Cryptocurrencies?

2022/08/22 10:23:50

The crypto industry has always gone through cycles and phases, marked by rising and falling prices, as well as numerous incidents that have shaken the sector, such as bankruptcies, hacks, scams, and more.

With users scrambling to safeguard their funds from compromised or insolvent platforms, it is more important than ever to consider the safest methods for storing cryptocurrency.

In this article, we will take a look at the best ways to store crypto assets, and explore all the available options. Unlike other valuables where you decide how to best secure them, there are rigid options as to how to secure your cryptocurrencies, and finding the best option is what we want to help you with. Let’s get into it!

What are Digital Wallets?

In general terms, a digital wallet is the electronic version of your physical wallet that stores your fiat currency and other valuable items (like identification cards, membership cards, coupons, licenses, loyalty cards, transportation tickets, hotel reservations, and so on.). A digital wallet takes it up a notch, though, and can be expressed as a financial application that enables an individual to store both fiat and digital currency, transact, and track financial activities.

In the world of cryptocurrency, there are two basic categories to divide crypto wallets or digital wallets, namely:

  • Custodial wallets
  • Non-custodial wallets

Custodial Wallets

Let's start by breaking the terms down. We've seen what a wallet is above; now, let's address "custodial."

"Custodial" is derived from the word "custody," and it means the legal right to take care of something or someone (according to the Oxford dictionary). A custodial wallet is a crypto wallet controlled by the cryptocurrency platform you decide to use to transact or start your journey in crypto.

They are the wallets you find on the web pages and mobile applications of crypto exchanges, investing platforms, etc.

They are called custodial wallets because the crypto platforms own the keys to your wallet and retain the right to "take care of" or "secure" your cryptocurrencies. You must trust the security protocols adopted by the platform or transfer your funds from that wallet to the other kind of wallet we'll discuss later in this article.

A vast majority of investors and traders use custodial wallets because of their advantages, such as:

  • They are easy to use as they are already online and connected to your account. You simply log in and transact.
  • They reduce the security burden on the user's end since the exchanges are responsible for that.
  • You don't have to worry about losing your cryptocurrencies when all you have to do is log into the platform and get immediate access to your funds.
  • You can enjoy features such as the ability to buy or sell cryptocurrencies, spot trading, futures trading, and others that you wouldn't usually get via a non-custodial wallet.

While the exchange of your choice will determine the exact advantages, all crypto investment platforms work similarly in this regard.

The other side of the coin that could be considered a disadvantage(s) of custodial wallets is that you're not in total control of your funds; a third party handles them for you. You have to be trusting that one day you wake up and can't log into the platform for whatever reasons. Aside from that, there's not much to complain about, and it is currently used by millions of investors worldwide.

If you are an inexperienced crypto user, or have doubts about having the responsibility of holding the wallet keys yourself, custodial wallets are right up your alley.

With everything said, this is a good way to store your cryptocurrency, but it has slight tradeoffs between functionality and security.

Non-Custodial Wallets

We bet you can already guess what this wallet represents. Non-custodial wallets are crypto wallets that confer the responsibility of securing your funds on you. It eliminates third parties. Not everyone is trusting enough; some are gladly skeptical and prefer to secure their funds themselves.

While some transfer all their funds from custodial wallets to their non-custodial wallets, others only transfer bigger portions of their funds to their non-custodial wallets and leave smaller amounts in the exchange for quick transactions.

Non-custodial wallets generate something called recovery seed or seed phrase to help you secure your funds. It is usually a string of random words that can be used to retrieve your funds if you forget your log-in details or lose your phone.

Since you're in full control of your funds here, the non-custodial wallet hosts do not save a copy of your recovery seed, so if you lose your recovery seed or seed phrase, your crypto funds are permanently gone. It is left for you to secure the recovery seed by saving it to the cloud, writing it down, taking a screenshot, etc., whatever appeals to you as safe.

Non-custodial wallets can be web-based, mobile applications, desktop apps, or hardware devices.

Hot and Cold Wallets

We can make another important distinction between different crypto wallets based on whether they have internet connection, namely:

  • Hot wallets
  • Cold wallets

While most people are talking about non-custodial wallets when they mention hot or cold wallets, custodial wallets have their hot and cold versions too, which we will mention below.

Hot Wallets

"Hot" wallets are synonymous with "online" crypto wallets. They are wallets connected to the Internet one way or the other, either as web-based or mobile and desktop applications. Hot wallets can be custodial and non-custodial. A non-custodial hot wallet gives you absolute control over your crypto funds, and since it is connected to the Internet, makes transactions easier and faster. To top it all, they are mostly free to use.

Hot wallets are a great option for storing your cryptocurrencies. It would have been the best, except for one thing: the Internet connection itself. Hot wallets existing online make them highly susceptible to hacking, which has become a profitable business for malicious actors in those ranks.

Hot wallets generate the private keys to your funds online, which means a targeted and successful hack gives the hacker access to your private keys and, by extension, your funds.

It is your responsibility to take the necessary measures to strengthen the security of your wallet and your recovery seed. Smaller amounts can be kept in your hot wallets, while larger amounts can be transferred to your cold wallet. Hot wallets are still very good to use. The possibility of a hack doesn't guarantee that you'll be hacked. Therefore, you can still use it to store, transact, and track your crypto funds.

Examples of hot wallets are KuCoin Web3 Wallet, Trust Wallet, MetaMask, Electrum, Edge Wallet, Exodus, Mycelium, etc.

Cold Wallets

This is the destination we've been driving to arrive at. A "cold" cryptocurrency wallet is synonymous with an "offline" cryptocurrency wallet and is considered the safest way to store your cryptocurrencies.

Unlike hot or online wallets, cold wallets are not connected to the Internet or, better put, do not exist on the Internet. This eliminates the threat of hacking or any malicious online activity. There are two types of cold wallets: hardware wallets and paper wallets.

Whenever people talk about cold wallets, they are most likely referring to non-custodial wallets. However, we can also mention exchange cold wallets, which are offline wallets that are used to provide additional safety for the funds not currently needed for liquidity.

Hardware wallets

A hardware wallet usually comes in the form of USB sticks that hold your private keys. These devices are crafted so that connecting them to an Internet-connected device or a virus-ridden software does not affect your private keys or funds.

Another interesting thing about hardware wallets is they are open-source in nature. So everyone in the community gets to attest to the safety of the device as opposed to a bold claim of "safety" by any company.

Hardware wallets come in different capacities. Some can store over a thousand cryptocurrencies, while some can only take a few. When you connect the hardware wallet to your device, a usable address to send and receive crypto is generated. Like all non-custodial wallets, a one-time seed phrase is also generated to help with wallet recovery should you lose your hardware wallet.

Paper Wallets

Paper wallets are another form of cold crypto storage. These wallets are pieces of paper that carry your wallet's public key and your private key.

The process involved is as simple as finding a web-based wallet generator that generates a public and private key and QR codes that you can print out on paper and lock away.

The only way anyone accesses the crypto in the account is by accessing the paper. In the absence of that, it becomes impossible for the cryptocurrency within the wallet to be compromised. While a paper wallet is highly secure, setting it up requires caution.

As a user, you are advised to disconnect the internet access to your device when generating your wallet address and to clear your browser history immediately after generating your address and keys. Checking for malware on your device before starting the procedure is also advisable.

Paper wallets have been around since the early stages of Bitcoin and have long been considered the most secure by investors from way back. You most likely didn't hear anything about paper wallets because other forms of crypto storage have emerged over time.

Are paper wallets fully tamperproof? You might ask this. The answer is no. Some long-term investors are convinced that the risks associated with paper wallets outweigh the security it brings.

Paper wallets could be lost. Depending on the strength of the ink used to print, the ink could fade off, the wallets could be torn, and is also subject to human error.

If secured properly, paper wallets are the best cold storage option. If mishandled, it can be very costly.

Tips for Storing Your Cryptocurrency Safely

Here are some recommendations to help you safely store your crypto assets:

  • Store a larger percentage of your cryptocurrencies in a cold wallet, and keep the amount you want to use more often on hot wallets.
  • Only keep smaller amounts and what you can afford to lose in your hot wallets. Better put, only leave as much as you need for a transaction in your hot wallet.
  • Find multiple ways to record and store your seed phrase or recovery seed. Write it down on a piece of paper, inscribe it on steel, print it out, etc. Whatever you think of, ensure your recovery seed is accessible, but only to you.
  • Do not share your private key or recovery phrase with anyone.
  • Always back up your wallets.
  • Set a very strong password for your wallet.
  • In the case of custodial wallets, make sure to go through the KYC process, as well as enable two-factor authentication.
  • Always keep your software wallets up to date. The updated version of your software wallets most likely comes with stronger security.
  • You can consider multi-signature, where two or more persons are signatories to a wallet.

There are many more tips to stay safe, but you can get started with these and consult other reliable security sources.

The Final Decision is Yours

There are different ways to store your cryptocurrency, but how you want to store them is left to you. Cold, hot, custodial, or non-custodial wallets all have their ups and downs; you must weigh your options based on your preferences.

Cryptocurrencies are a big deal that many people will do anything to get their hands on. You owe yourself and the cryptocurrencies you have to keep them safe. It is advisable to work with more than one digital currency wallet. Remember the basics always; you can never go wrong with a very strong password, a secured seed phrase and private key, and a cold wallet for larger crypto holdings.

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