One of the most critical aspects of the cryptocurrency investment process is the secure storage of your holdings. Cryptographic assets need to be held in so-called “wallets” that you control as opposed to being held at a bank or with your broker as is the case for traditional securities.
In this guide, you will be introduced to the different types of cryptocurrency wallets, you will discover which ones are the most secure options to store your digital assets, and you will learn how to store your assets securely.
Types of Wallets
Cryptocurrency wallets can be split into two categories. Hot wallets, which are connected to the Internet at all times, and cold wallets, which are offline and only connect to the Internet to transact.
Hot wallets include online wallets, mobile wallets, hybrid wallets, desktop wallets, and exchange wallets. Cold wallets, also referred to as cold storage, include hardware wallets and paper wallets.
Let’s look at each of these in more detail.
Online wallets are web-based cryptocurrency wallets that enable you to store your digital currency online, which makes it easily accessible for online purchases and quick money transfers. Examples of popular online wallets include CoinPayments and CoinSpace.
However, online wallets are considered one of the unsafest wallet options as the potential for losing funds due to a hack of the wallet provider is relatively high. Hence, it is recommended only to store small amounts of crypto in online wallets, mainly for the use of making small payments or online shopping.
Mobile wallets are smartphone applications that enable you to store, send and receive cryptocurrency on your phone. They are an excellent way to store smaller amounts of cryptocurrency on-the-go and have become particularly popular among new cryptocurrency users.
Having said that, they are not the safest place to store large holdings as your mobile phone can be accessed by hackers and should, therefore, only be used for making in-store payments or holding small holdings.
Hybrid wallets are accessible through both mobile and web-based applications and are widely considered the most user-friendly. They are the best option for everyday cryptocurrency usage. However, they do not offer the best storage option for long-term investments or a large amount of crypto as they are connected to the Internet and, thus, potentially vulnerable to cyber theft.
Desktop wallets are the original cryptocurrency wallets. Those of us who have been around long enough will remember syncing the entire Bitcoin blockchain using the Bitcoin Core desktop client. If you did this on an old laptop, it could take a while.
Effectively, every cryptocurrency has a desktop wallet that — in many cases — also acts as a full node, meaning it downloads the entire blockchain. Desktop clients are, therefore, considered one of the more secure cryptocurrency storage options. Moreover, the cryptocurrency held in a desktop wallet is not stored online so it cannot be easily accessed by hackers.
The most popular multi-currency desktop wallet currently in the market is Exodus.
Exchange wallets refer to the wallets that are linked to your account on a cryptocurrency exchange. To buy and sell digital assets on a centralized exchange, you will need to first transfer your bitcoin (or another asset) onto your exchange wallet. Once it is there, you can convert it into any other tradable asset on the platform. Once that trade has been executed, the newly bought asset will appear in a designated wallet on your exchange account.
It is recommended to transfer the asset into a personal wallet after trading as exchange wallets have historically been the most vulnerable to cyber theft.
The two cold storage options that crypto investors have are hardware wallets and paper wallets.
Hardware wallets are USB-stick like physical devices that hold your private keys. These wallets enable you to securely store your digital assets offline while still being able to carry your crypto holding on you when on-the-move.
Given that your cryptocurrency is held offline, hackers are not able to access your coins and tokens. Moreover, due to being an easy-to-carry physical device, hardware wallets have become the go-to wallet option for crypto investors.
Finally, there are paper wallets, which — as the name suggests — are paper-based wallets that contain a wallet’s private keys. These wallets are paper printouts that are comprised of two QR codes. The first QR code is the public key that you can use to receive cryptocurrency while the second is your private key, which you use to send cryptocurrency from your wallet from your paper wallet.
Bitcoin paper wallets, for example, can be generated on BitAddress. Most other cryptocurrencies offer a similar paper wallet generation service.
Paper wallets provide an excellent way to store digital assets for the long-term provided you are able to store the paper wallets in a safe or a similarly secure storage unit to ensure it cannot be damaged.
How to Store Your Cryptoasset Investment Securely
While you have no control over how much the value of your crypto portfolio will increase or decrease due to market movements, what you can do is to ensure that you do not lose any of your investments due to bad wallet management.
To securely store your assets, you need to:
- Hold the majority of your crypto holdings in cold storage
- Back up your wallet recovery phrases and store them in a secure place
- Never share your private keys or any account passwords
- Follow basic cybersecurity procedures when handling crypto
Use Cold Storage
Serious investors use cold storage to secure their cryptoassets. If you are holding more than a few thousand dollars in crypto, you definitely need to be using a hardware or paper wallet to ensure that cybercriminals cannot get their hands on your digital assets.
Back Up Your Wallet
Whatever wallet you are using, it is imperative that you back up your wallet and securely store the backup phrase offline so that you can access it in case the wallet is lost or damaged.
A backup phrase enables you to regain access to a cryptocurrency wallet in case it has been physically damaged, lost, or stolen. Without your backup phrase, your digital asset holdings would otherwise be lost in these scenarios.
Never Share Your Private Key or Passwords
While it should be common sense, it is important to reiterate that you should never share your private keys or personal account details such as passwords with anyone, especially not online. This can result in your account being accessed and your funds being stolen.
Follow Basic Cyber Security Procedures
Finally, when executing trades or managing your cryptographic funds online, it is important to follow basic cybersecurity measures.
That means, downloading an anti-virus and malware protection software, not clicking on links or attachments sent from unknown senders as those could be crypto-stealing malware, and avoiding any websites or downloads that may seem unkosher.
By following these simple guidelines, you are already able to avoid the majority of cyber threats out there.