Strategies for Securing Digital Currencies
When you manage digital currencies, such as cryptocurrencies, securing their storage is crucial. Unlike traditional bank accounts or brokerage investments, cryptocurrencies don't come with the same degree of security. As the owner, it's your responsibility to safeguard your digital assets.
Losing access to your cryptocurrencies is a common issue that has been prevailing since the launch of, for instance, Bitcoin (BTC -1.91%). It's estimated that around 3 million to 3.8 million Bitcoins have been irretrievably lost, as per Unchained.
You have several methods for storing cryptocurrencies, including hardware devices, software applications, and even a basic piece of paper. Understanding each storage method will help you decide the best wallet(s) to shield your cryptocurrencies.
| Aspect | Custodial Wallet | Cold Wallet | Hot Wallet | Physical (Paper) Wallet || --- | --- | --- | --- | --- || How it operates | A third party, such as a cryptocurrency exchange, maintains your digital currencies. | A tool, like a hardware device, stores your digital currencies offline. | An application that keeps your digital currencies online. | Physical storage of the private keys for your digital currencies. || Advantages | Simplest choice and highly convenient. | Provides highest security level. | User-friendly and quick access. | Cost-free way to keep digital currencies offline. || Disadvantages | Leaving digital currencies in a third party's custody poses a security risk. | Requires expenditure and inconvenience. | Leaving digital currencies online present security risks. | Inconvenience and risk of losing the paper wallet. || Typical cost | Completely free. | $50 to $250. | Completely free. | Completely free. |
Custodial wallets
Storing digital currencies in a custodial wallet
A custodial wallet can be thought of as the default choice for digital currency storage. A third party takes care of your digital currencies, either through cold (offline) storage, hot (online) storage, or a combination of both.
How it works
When you acquire digital currencies from cryptocurrency exchanges, apps, or brokers, they usually store it in a custodial wallet they manage. If you wish to store it yourself, you can transfer it to your own hot or cold wallet.
Another party, such as a crypto exchange, stores your cryptocurrency.
However, not all crypto platforms allow this. Some brokers and apps only let you buy and sell digital currencies but not transfer them. In such cases, the only option is to use their custodial wallet.
Hardware that stores crypto offline.
Many users utilize custodial wallets without any issues, and this type of wallet has its advantages:
Application that stores crypto online.
- It entails the least amount of user effort.
- Since your digital currencies are within your account, they're simple to access if you want to trade them.
- You don't need to fret about losing a digital currency wallet. As long as you can access your account, you can access your digital currencies.
Physical storage of private crypto keys.
On the flip side, a third party controls your digital currencies. You're relying on its security measures and trusting that it won't lock you out of your account.
Although custodial wallets aren't as secure as self-managing your digital wallet, they're a more convenient option for investing in digital currencies. If you decide to go with a custodial wallet, ensure the platform you choose prioritizes security.
Benefits
Cold wallets
Simplest option and most convenient.
Storing digital currencies in a cold wallet
Highest level of security.
A cold wallet refers to an offline digital currency storage solution. There are varied methods for offline digital currency storage, including fabricating your own free paper wallet (which we'll discuss later). However, the most common type of cold wallet is a hardware wallet.
Convenience and ease of use.
Hardware wallets are small devices that connect to your computer and store digital currencies. They link to the internet only when sending and receiving digital currencies, but they keep your funds offline otherwise.
Free way to store crypto offline.
Here's how cold storage on hardware wallets operates:
- Each hardware wallet supports certain types of digital currencies. Some can store more than 1,000, while others store only a few, such as Bitcoin and a few others.
- By connecting your hardware wallet to your computer, you can generate an address for receiving digital currencies to the wallet.
- You can send digital currencies from the wallet to another digital currency address.
- Each hardware wallet has a recovery phrase (also known as a recovery seed). This phrase enables you to recover your digital currencies if you lose the device itself. Keeping this phrase secure is essential because anyone who gets it can access your digital currencies.
Drawbacks
Offline digital currency storage is generally considered the best option from a security perspective, and many platforms use it to secure most of their digital currencies. While your digital currencies are offline, they can't be stolen by hackers. For substantial digital currency investments, a cold wallet is a wise investment. Several widely-reviewed hardware wallets are available for $50 to $250.
Security risk of leaving crypto in another party's possession.
The main disadvantage of cold wallets is convenience. Since you need to attach your cold wallet to move digital currencies, the process is lengthier than it would be if you kept everything online.
Cost of device and inconvenience.
There's one issue with using hot wallets, but it's a substantial one. Since they store crypto digitally, they come with the risk of being hacked. Although the likelihood of this happening is relatively low and many people use hot wallets without any issues, it might not be a risk you'd want to take with substantial crypto funds.
Security risk of storing crypto online.
Cold Storage Alternatives
Inconvenience and risk of losing wallet.
Storing Cryptocurrency with Physical Wallets
A physical crypto wallet, also known as a paper wallet, is another form of cold storage. A paper wallet consists of public and private keys, usually presented as both a string of characters and scannable QR codes.
Average cost
These keys are instrumental in carrying out crypto transactions. You can receive crypto using a paper wallet with the help of public keys. To send crypto from the wallet, you would need to scan the public and private keys.
Free.
Paper wallets share advantages with hardware wallets, providing better security by keeping your crypto offline. Creating your own paper wallet cost you practically nothing, making it an excellent option if you're looking for maximum security at the lowest possible expense.
$50 to $250.
However, paper wallets are the least user-friendly cryptocurrency storage options. Despite anyone following steps online to create their own paper wallet, hardware wallets require less effort to learn.
Free.
Related Cryptocurrency Topics
Free.
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Safety Measures for Cryptocurrency Storage
Here are a few tips to help you securely store your cryptocurrency:
- Store the majority of your crypto in a cold wallet since that's the most secure option.
- Use a hot wallet for smaller amounts of crypto that you want readily available for trading.
- Physically record the recovery phrases for your crypto wallets. You can write them down, and there are also steel tools designed for recording crypto recovery phrases.
- Securely store your recovery phrases in a location that's exclusive to you.
- Never reveal your crypto wallet's recovery phrase or private keys to anyone, and avoid saving them on your computer.
To wrap up the process of storing cryptocurrencies safely, start by selecting one or more crypto wallets. I suggest opting for a hardware wallet for most of your crypto assets and downloading a hot wallet for easy access to crypto. Transfer your crypto to your wallets, record your recovery phrases, and, most importantly, keep those phrases safe and secure.
Lyle Daly has investments in Bitcoin. Our Website has stakes in and advises Bitcoin. Our Website has a disclosure policy.
In the context of managing and securing cryptocurrencies, it's crucial to understand the advantages and disadvantages of different storage methods, such as custodial wallets, cold wallets, and physical wallets. While custodial wallets offer convenience, users have to trust the platform's security measures and might face security risks due to leaving their digital currencies in another party's custody. On the other hand, cold wallets provide the highest level of security but may require expenditure and inconvenience due to their offline storage nature. Physical wallets, such as paper wallets, offer a cost-free way to keep digital currencies offline, but they come with the drawback of being less user-friendly and pose a risk of loss if not handled carefully.
