What Are The Safest Ways to Store Cryptocurrency?
Updated On July 26, 2023 | by Abby Hill
There are inherent risks associated with cryptocurrency, whether you are betting on crypto markets or holding onto Bitcoin or Ethereum for the long term and waiting for its price to increase. Regardless of your intentions, knowing how to store your cryptocurrency assets securely is essential because they will likely disappear forever if they fall into the wrong hands.
Scammers continually seek ways to relieve unsuspecting investors of their cryptocurrency hauls. Indeed, a study Chainalysis performed and published in August 2022 shows some $1.6 billion worth of cryptocurrency was lost to scammers by that date, which is an astronomical sum. That eye-watering amount does not include the staggering $8 billion of customers’ funds lost during the spectacular collapse of the FTX crypto exchange. It should be evident that securely storing your crypto, regardless of its value.
What Are the Various Types of Cryptocurrency Storage?
Cryptocurrency Exchanges are the most common way to store the digital tokens that are cryptocurrency because they are where most investors purchase and sell assets. Popular exchanges such as Binance and Coinbase are user-friendly and are considered centralized because they do not leverage the blockchain. They act as a middleman in transactions, in addition to serving as a wallet of sorts.
Ease of access to your assets is one of the main reasons for the popularity of exchanges. However, these online entities often retain control of your assets because they do not allow you to access the private keys needed to recover your account. These so-called custodial wallets are generally watertight, but you must trust those running the company.
FTX was a significant player in the cryptocurrency realm, valued at some $32 billion at one stage. Everything looked fine from the outside, but the reality was the company was using assets to help prop up the FTX owner’s hedge fund. FTX filed for Chapter 11 bankruptcy after discovering an $8 billion black hole in its accounts. Those funds are almost certainly lost forever.
Online wallets are sometimes called hot wallets because they are connected to the internet. Although these wallets are protected with state-of-the-art security, they are still vulnerable to cyber attacks, fraud, and scams.
Cold Wallets Are Best For Larger Amounts or Long-Term Investments
Cold wallets are called such because they are not connected to the internet; they are sometimes referred to as hardware wallets. These cold storage wallets range from basic USB sticks to devices built for the sole purpose of storing digital assets such as Bitcoin. Although cold wallets are far more secure than hot wallets, they do have some negatives and risks associated with them, too.
For example, you must use a strong passcode or passphrase on your cold storage wallet. Think along the lines of combining five words with a mixture of capital and lowercase letters, a few numbers exchanged for letters, and a sprinkling of special characters for good measure. Such a password is difficult to remember, so it will likely need storing itself, which comes with risk.
It often costs a transaction fee to transfer assets from cold to hot storage, too, whereas hot wallets are usually free of these charges or are much cheaper. However, the fact they are immune to hacking attempts more than makes up for this.
Cold wallets also risk failing; they are technology, after all. Furthermore, you risk misplacing or losing your cold storage wallet. Do you not think you would accidentally throw away your physical wallet? Neither did James Howells of Newport, Wales, who threw out a cold storage hard drive by mistake in 2013. Howells claims the device held 7,500 Bitcoin when he inadvertently threw it in the trash.
Conclusion
Keeping your cryptocurrency on a well-known, trusted, and respected exchange is likely safe, but you want as much control over your wallet as possible. Cold storage wallets are far safer, especially if you hold a significant sum or are considering holding onto your assets for the long term and do not need to move them around freely.