How to keep your crypto safu
From wallets to storing your seed phrase
In recent days, we’ve often heard that X amount of bitcoin has been moved off exchanges and that the amount of Bitcoin held as deposits in exchanges is reaching a new low. It’s less surprising when considering that many Bitcoin holders are, in fact, in it for the long-run. And storing your cryptocurrencies safely is essential if an investor wants to benefit from them.
Additionally, one of the golden rules of the crypto world is “Not your keys, not your bitcoin”, referring to the public and private key attached to cryptocurrencies. While it’s an imperfect analogy, public keys are similar to your bank account’s account number. You can openly share them, which allows others to send you money. They won’t be able to withdraw any.
Private keys, in return, are more similar to your bank pin, which is needed to access your money. It’s an imperfect analogy because bank accounts are ultimately managed by a central institution that could access your cash.
That being said, it’s best practice to store crypto that you intend to hold for longer off-exchange and in a wallet.
Cryptocurrency wallets can be software or hardware devices that are designed to store your public and private keys. These days, most cryptocurrency wallets will support several blockchains such as bitcoin, ethereum, Cardano and others, enabling traders to store all their portfolio currencies in one place.
Wallets are broadly categorised into hot and cold wallets. Hot wallets are “hot” because they are constantly connected to the internet, allowing access to your crypto anytime. Cold wallets are “cold” because they store all your funds offline and not connected to the internet unless traders join them. While cold wallets can receive funds even offline, traders can’t move money out of a cold wallet without an internet connection. Another aspect differentiating cold from hot wallets is that they are tangible like paper or USB sticks, not something you’d just install on your phone.
Cryptocurrency exchanges use both hot and cold wallets on their platforms to keep traders funds safe. A majority of the crypto held is stored in cold storage, while a certain amount is kept in hot wallets to ensure quick execution of orders and purchases.
Experienced cryptocurrency traders use a combination of hot and cold wallets. Hot wallets to quickly trade, send or pay with crypto and cold wallets for HODLIng. They might also keep a portion of their crypto in lending protocols such as compound or in a staking pool.
In the following, we’ll cover the most common types of wallets and how to store your seed phrase securely.
Software wallets can be downloaded on your pc or installed as an app on your smartphone. Major wallet providers will have an active customer support team to help if issues arise and plenty of security measures in place. Nevertheless, all these security measures won’t help if a virus or malware attacks a device. Therefore, running virus scans and having anti-malware software installed is essential when using software wallets.
Providers of software wallets include the Bitcoin.com Wallet, Edge wallet and infinio wallet.
Cloud wallets have the advantage that they can be accessed from any computer, device or location as long as username and password are entered correctly. They’re very convenient as private keys are stored by a third-party. However, this also makes them more vulnerable to attacks. Famous examples of cloud wallets include MetaMask.
Non-custodial cloud wallets are slightly safer as they don’t allow the service provider to access your private keys. Very often, they are part of an exchange platform, letting you trade securely. Such wallets include the Crypto.com DeFi wallet, localcryptos and the wallet provided by Bitwala.
Paper wallets are a very affordable option to store your cryptocurrency offline. As the name implies, they consist of a physical copy or a paper print of your public and private keys. Occasionally, the term “paper wallet” is also used when referring to software that generates a digital file for print-out.
Paper wallets are relatively more secure than hot wallets, as hackers cannot access them. Crucial for the security of paper wallets is the way they’re stored — it’s a piece of paper after all, and that they’re never shared with others.
To send crypto from a paper wallet, one simply has to scan the paper’s QR code. By now, one can easily find instructions on generating a paper wallet for different cryptocurrencies. Examples include the MyEtherWallet and the Bitcoin Paper Wallet Generator.
However, it’s important to remember that paper is still a vulnerable material, easily damaged, burned or lost. Some traders laminate their wallet, create several copies, store them in different places, or engrave them in metal or other sturdy materials. We’ll get into that later when covering how to keep your seed phrases.
Compared to paper wallets, hardware wallets are a bit more expensive but provide a higher level of resilience as they’re not just a piece of paper. They store private keys on an external device that isn’t connected to the internet. Some of them look similar to USB sticks to untrained eyes. Most of them come with a web-interface that allows users to swap, trade or pay with their crypto quickly. Major wallet providers even allow for crypto to be put into a lending protocol to earn interest without leaving the wallet interface.
Hardware wallets are seen as the safest opinion for storing your crypto. Popular hardware wallets include Ledger, Trezor and Keepkey. When buying a hardware wallet, it’s recommended to buy directly from the manufacturer to ensure the authenticity of the product.
When setting up a hardware wallet, a recovery phrase will be provided, consisting of 12–24 words. This phrase can be used if the wallet password is lost, the wallet itself is lost, or the device starts malfunctioning. With the seed phrase, a trader will be able to recover their cryptocurrency holdings. Therefore, some consideration should be given to storing the seed phrase.
How to store your seed phrase?
Only if one is very confident in their memory should they store a seed phrase entirely in their head. For everyone else, it’s better to have a backup.
One way to store a backup is digital. That means writing it into a file, encrypting that file and storing it on your device. Nevertheless, this still leaves the risk that someone deletes the file or the device stops working. Cloud storage is one option to mitigate that risk, but again losing the point of self-custody if the cloud provider is down. Generally, when storing the seed-phrase online, it’s best to follow the 3–2–1 rule of backups: having at least three backups in two different types of storage and one being located off-premise ( in this case, not your house).
In general, it does bear some irony storing a seed phrase online while using a hardware wallet.
The other way to store a seed phrase is physically by either writing it down — which comes with the same challenges as paper wallets or using sturdy materials like metal. For anyone who wants to give it a go, companies like Billfold, Cryptosteel or Blockplate provide various options.
Nevertheless, keeping a seed phrase on metal still doesn’t necessarily help if the backup metal gets into the wrong hands.
Instead of keeping the whole phrase in one place and risking a breach, users can decide to split the seed phrase in the spirit of decentralisation. Shamir secret sharing enables secrets to be divided into multiple parts that each on their own is useless. Only once combined they will recover the whole secret, in this case, the seed-phrase.
Crypto holders could split their seed phrase into smaller pieces and hand them to trusted individuals, be that in the form of paper, metal or an encrypted file. They can also specify how many shares of the phrase will be necessary for a full recovery. It’s possible to split a phrase into ten pieces but only require eight to retrieve the original seed phrase.
It’s an optional step for storing a seed-phrase, but it’s not unheard of that people have had their complete seed-phrases stolen because they were stored in a “convenient” location.
While hot wallets provide ease of use and access for storing cryptocurrencies, long-term cold wallets are still the gold standard. Whenever using a hardware wallet, it’s crucial to ensure that the seed phrase is stored securely. For an added level of resilience, it’s highly recommended to look at Shamir Secret Sharing and consider spreading a seed phrase among trusted individuals (could even be lawyers).
Enjoy HODLing 💎🙌