One of the most important things to consider when holding your cryptocurrencies is the safety aspect. It doesn’t matter how much your coins are worth if you suddenly lose access to them or they get stolen.
One of the primary goals of cryptocurrencies is to eliminate the middlemen, such as banks or insurance companies. While on the one hand this elimination may lower transaction fees and give you better control over your assets, on the other hand, it comes with a responsibility. Since there isn’t the same money protection in the crypto world compared to traditional intermediaries, making sure your crypto funds are SAFU is your responsibility.
However, storing your coins safely isn’t as demanding as it may seem at the first glance (especially now that you’ve found the complete guide to it). Let’s dive into 5 different ways to secure your crypto funds, how they are similar and how they differ from one another.
What is a crypto wallet?
A crypto wallet is a software program designed specifically to store your public and private keys, send and receive digital currencies, monitor their balance, and interact with numerous blockchains. Having a crypto wallet is a must if you want to manage your digital assets and keep them secure.
There are different types of wallets that you can choose among when it comes to managing your crypto funds, each of them suited for different purposes, so you strike the right balance between functionality and security. Generally, wallets are either custodial or non-custodial (self-custodial). Non-custodial wallets put you in complete control of your crypto funds as you’re given your own private keys, therefore you don't have to rely on a third party (custodian) to keep your crypto safe. In contrast, in the case of a custodial wallet, private keys are held by a third party, which has full control over your funds while you only give permission to send or receive tokens.
Non-custodial wallets can be further divided into hot (software) or cold (hardware) storage. A hot wallet is connected to the internet and may on the one hand be vulnerable to online attacks that can cause your funds to evaporate into thin air, but on the other hand, it’s faster and eases up the trading process. On the flip side, a cold wallet is not connected to the internet, which means it offers better security, but less convenience.
Custodial versus non-custodial wallet
A custodial wallet could be considered a default wallet for crypto storage since all tokens you buy on centralized exchanges are automatically stored in a custodial wallet they control. If you want to have total control over your keys and consequently over your crypto funds you need to store them in your own non-custodial wallet. While a custodial wallet might seem like a more convenient option because it lessens your personal responsibility (since you don’t have to store your own private keys), it requires trust in the third party.
Hot vs Cold storage
If you want to notch up the security of your tokens, you want to store them yourself. You can choose between storing your crypto funds in a ‘hot’ or ‘cold’ wallet. The essential difference between the two options is the following. Hot wallets are applications that store crypto online, meaning that they’re connected to the internet and therefore vulnerable to online attacks. Contrarily, cold storage refers to physical hardware wallets that store crypto offline, preserving security, while posing as a more costly and inconvenient option.
Which are 5 different options one can opt for?
Every crypto hodler has to choose among (in broader terms) storing their funds in 4 different types of wallets. The first one is a custodial wallet, which (as already discussed) is a ‘primary’ option. You basically put responsibility for managing and securing your digital assets on the crypto exchange, which lifts off the burden of responsibility from your shoulders but makes you rely on the third party. If you opt for this option, do some research and choose a reputable exchange that keeps as many funds as possible in cold storage.
The second option is desktop wallets which are the first type of hot wallet. Here you can control your keys and thus your transactions without a third party, but keep in mind that you’re still dealing with an online wallet, which is connected to the internet and therefore more vulnerable to hacking attacks. A very similar type of wallet that more or less possesses the same characteristics is a mobile wallet. They prove to be handy, as they give you a perk of having access to your funds everywhere and all of the time, but some regard it as a less protected store.
The most secure option that gives you control over your funds, as well as takes them offline is cold storage offline wallet as it does not involve connectivity to the internet. The most popular are hardware wallets, while another choice is paper wallets. While hardware wallets are physical devices to store your currency and your private keys, paper wallets are basically printed piece of paper that contains QR codes and private keys to access your crypto funds. The latter is a cheaper (free) alternative but is less popular since hardware wallets offer even higher levels of security.
Which one to choose?
When choosing where to store your digital funds, you have to strike the right balance between functionality and security, which can most easily be achieved by using a combination of two or more different types of wallets. It’s advised to keep bigger amounts of coins or amounts that you’re willing to hodl in the cold storage while having smaller amounts of coins that you want to trade frequently stored in a custodial wallet so it’s easily accessible when you want to enter or exit positions.