One sticking point for a lot of individuals new to crypto is the process of safely storing the cryptocurrency that they’ve acquired. There are lots of different options for storage, each with its own advantages and disadvantages, with the major trade-off being between the level of security and the ease of use.
Before I get into the different options of storing your cryptocurrency, it’s worth highlighting the importance of keeping your personal information private. Unlike with regular banking, if you accidentally send crypto to the wrong account, there’s no way to get it back. There’s no customer support for the blockchain because it’s completely decentralized (i.e. there’s no single company/entity that is actually in complete control it).
I’ll elaborate more on this, but the onus of managing and storing private access details has moved into the hands of the consumer, which ultimately puts you in control but also increases your responsibility to be careful with it.
Understanding the Basics of Storing Crypto
First things first, you’re going to want to understand the actual process of storing crypto, why you need to do it and how you’re able to actually use it once you’ve stored it.
To explain this in terms that everyone can understand, let’s compare the whole process to that of a traditional bank account.
The Traditional Banking System
Within the traditional fiat currency banking system, you store the large portion of your money within a bank. Funds can be sent into your bank account and you’re able to send funds to other accounts. In the case of sending money to another account, you’ll need to know the account number, routing number and some personal details of the receiving party. Once you have these details you’re able to ask your bank (in person, over the phone or online) to send funds from your account to the receiving account, using the details previously mentioned. The bank will charge you a transfer fee, usually between $15-$35 and the funds will hit the receiving party’s account within around 2-4 days. These fees and times dramatically increase when the money is being sent overseas.
The Cryptocurrency System
With cryptocurrency, you store your funds within a digital wallet. This wallet isn’t owned by anyone else but you (i.e. there’s no bank that runs your wallet service for you). Similarly to the traditional banking system, you can send and receive funds to other people. To do this, you need the public key of the receiving party (an alphanumerical string that has been cryptographically hashed) as well as the public key and private key for your own wallet. Your private key will look similar to your public key except only you will be able to see this and you should never share your private key (think of it like the password to your online banking account, whereas your public key is your username).
Once you have the public key of the wallet you want to send funds to, you create a transaction, similar to how you would with traditional online banking, and the funds will be sent to the receiving party. The transaction fees for this payment are significantly less but vary depending on the cryptocurrency – the average transaction fee for Ethereum transactions is $0.40. The funds will then hit the wallet of the receiving party within a few minutes, instead of a few days.
Cryptocurrency Storage Options
Now that you have an understanding of the mechanism for storing and sending your cryptocurrency, let’s look at the different options for storing them that are available. To make things a little easier, I’m going to break down the ways to store your cryptocurrency into four different types:
- Within an exchange like Coinbase, Bittrex, Gemini, etc. (least secure)
- Within an online/mobile wallet platform, like Jaxx or Bread. (more secure)
- Within a hardware wallet like Trezor or Ledger. (very secure)
- Within a paper/offline wallet that can be created via Walletgenerator.net/MyEtherWallet/MyCrypto. (most secure)
The above four options are the most popular ways to store crypto, but the likelihood is that you’ll store different types of crypto in different locations, and may utilize some forms of storage, like exchanges, for a short period of time and then shift assets into your other wallets.
Storing Crypto: Which wallet solution is the best?
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Storing Crypto in an Exchange
Of all the options available, this is the least secure. The reason for this is that most exchanges are in fact centralized, meaning that they’re operated by a single entity that manages the security of your data for you. This may sound good but it means that if someone manages to hack their platform, all of your details – and those of the rest of their user base – will be exposed.
You’ll only really want to store your crypto in an exchange at the point when you’re planning any trading. Once you’ve completed a trade, the best thing to do is then transfer it out of there and into a more secure solution, like a hardware or paper wallet. Due to the minuscule transaction fees, this is simple and cheap to do.
Storing Crypto in a Mobile/Online Wallet
Mobile wallets are apps that you can download for your mobile device to store your cryptocurrency. These wallets often have basic functionality but are particularly useful for making quick transactions to other accounts, in particular for actually buying goods/services. The downside is that if your mobile device is stolen, you’re at risk of losing all of your funds.
Relatively similar in functionality to a mobile wallet, an online wallet lives on the cloud and can be accessed from any device. They’ve very handy for making quick transactions from any location/device, but the private keys are often controlled by the online wallet provider, meaning that if they get hacked, you could lose everything. As an extra security precaution, always set up 2-factor authentication on the exchange if they offer it and make sure you use a unique password.
Storing Crypto in a Hardware Wallet
Hardware wallets are much more secure than the above options. They often come in the form of a flash drive type device, the most popular of these being either provided by Trezor or Ledger. This wallet operates offline and manages your private key for you (at least, most of them do), so even if someone steals the device itself, they can’t actually access your funds without this information. That said, if you lose the device then you could lose everything – just like if you lost a pile of cash!
Some hardware wallets provide a 12-word security backup phrase that you can use in case you lose your hardware wallet and want to get back access to them. Again, you’re the only one that knows this information and the hardware wallet provider doesn’t know this, so you’re not harmed if the company is hacked.
For anyone storing cryptocurrency that they’re not planning to trade regularly, I’d recommend using either a hardware or a paper wallet. Another consideration for hardware wallet owners is to get a fireproof safe that they can store it in during the time it’s not being used, just as an extra security measure.
Storing Crypto in a Paper Wallet
A paper wallet is by far the most secure way to store your cryptocurrency. That said, they’re not always the most user-friendly. You can set up a paper wallet through a service like MyEtherWallet, MyCrypto or WalletGenerator.net and it will simply generate a public and a private key for you. Only you will have access to this information, and if you lose it, it’s gone forever.
Once your public and private key are generated, you’ll also often get a QR code that you can use as well. The public key, private key, and QR code can then be printed off onto a piece of paper (hence, “paper wallet”) where you will store the details. It’s vitally important that you store these in a safe place, and I’d even consider laminating the paper to avoid damage from liquid spillages. The final thing to remember here is that if someone steals the piece of paper with all these details on then they’ll get full access to all of your funds – this is where I’d recommend having a fireproof safe to store them in.
Can I Store All Types of Crypto in One Wallet?
This is where things start to get a little more complicated. Right now, there isn’t a wallet that can store any type of cryptocurrency. Within traditional banking systems, if you were to trade US dollars into a UK bank account, the bank will automatically exchange them into British Pound Sterling based on the current exchange rate. With crypto, you can only currently transfer certain cryptocurrencies into wallets that support the storing of that specific crypto. As a result, you may own a few different wallets to store some of your different cryptos.
I’d imagine that as this space begins to mature, there will be a one-fits-all wallet that can accept any form of cryptocurrency, but until then you’ll want to just check that the wallet you’re using actually supports the cryptocurrency that you want to store.
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