Keeping Your Private Keys Safe
Your cryptocurrency can be stored in two types of wallets: Custodial and Non-Custodial
By now, we all know the cautionary tales of people who lost thousands (yes, you read that correctly) of Bitcoin simply by being careless. How you store your cryptocurrency is extremely important because it’s difficult to recover if it is stolen or you lose access. Cryptocurrencies like Bitcoin are digital, so they don’t need physical storage. But you do need a secure way to store the private key for it.
Cryptocurrencies are stored in a wallet which, despite the name, is also digital. Each wallet is linked to a public and private key; two long strings of random numbers and letters.
- A private key gives the owner access to their wallet
- A public key is an address that lets anyone send cryptocurrency to that wallet
Digital wallets fall into two categories: custodial and non-custodial. You could compare a custodial wallet to keeping money in the bank, and a non-custodial wallet to storing it in a safe in your house. The distinction is what happens with the associated private key.
What is a non-custodial wallet?
The safekeeping of your private key is your responsibility.
The beauty of cryptocurrency is that it lets you take ownership of your money in whatever way suits you best. Some people prefer to have more control, so they opt for a non-custodial wallet, which gives the owner access to its private key. Really, these are more for the crypto-grownups who know what they’re doing. At Luno, we think this is a great option for those with the confidence and expertise to take control into their own hands and manage security.
The benefit of this is that it gives the owner more control and prevents situations like a custodial wallet freezing their account for suspicious activity.
There are different types of non-custodial wallets:
- Hardware wallets — a hardware device, such as the Trezor or Ledger
- Paper wallets — a physical document with your private and public keys
- Desktop wallets — a program installed on your computer
- Mobile wallets — an app installed on your phone (this isn’t the same as downloading the app for a custodial wallet like Luno)
- Web wallets — a cloud-based wallet you can access online from any device
Hardware wallets are generally the safest option as they’re resistant to many of the types of attacks that can compromise software wallets. Some companies are even beginning to offer private key recovery solutions. There’s still the risk of bugs emerging in the software, or of the wallet getting lost or stolen. The only way to know if a given brand is secure is to look at their track record, but there’s still no telling what might happen in the future. Hardware wallets can also be expensive.
Desktop wallets are also relatively secure, but the downside is that they’re only accessible on one particular computer. So if it gets stolen, attacked or lost, you lose access — although you do have the ability to store your private key elsewhere. Many desktop and hardware wallets allow you to generate a seed phrase so you can recover your cryptocurrency if you lose a device, but this can also be lost.
Online wallets are more convenient because you can use them from any device, even if your main one goes missing. The downside is that they’re arguably the least secure form of non-custodial wallet and are vulnerable to hacking.
What is a custodial wallet?
Similar to trusting a bank with your money
With a custodial wallet, you don’t have access to your private key. Instead, a third party looks after it for you. Like a bank, it’s ideal for most people because you don’t have to worry about security. Looking after your private key is more complex than it might sound, especially for first-time cryptocurrency users.
You could consider a custodial wallet your crypto-key training wheels.
So, while we’re in favour of non-custodial wallets for more experienced users, we do recommend a custodial wallet for beginners or anyone who prefers the convenience of not having to deal with the complexities of security.
By choosing a reputable company and taking basic measures like using two-factor authentication, you don’t need to think much about protecting your cryptocurrency with a custodial wallet. The company does it for you, so you can’t lose your private key.
A custodial wallet means you can easily make transactions on a day-to-day basis. You simply use your password to access your account, which you can reset if you forget it.
This user experience is simpler and more convenient than managing your non-custodial wallet yourself.
Luno offers a custodial wallet which is perfect for those who want simplicity, security, and easy access to their money. Seeing as the industry is largely unregulated and there are few protections for customers, it’s crucial to research any company you trust with your cryptocurrency.
At Luno, we protect your money by keeping the majority of customer funds in ‘deep freeze’ storage, which requires multiples private keys and no one person ever has access to more than one. We keep a portion of our customers’ cryptocurrency in a multisignature ‘hot wallet’, with control of the keys split between two companies. Our engineering and security team are always working behind the scenes to find new ways to protect your money. Learn more about how we keep your Bitcoin safe on our security page.
What is the best wallet for storing your cryptocurrency?
What’s good for the crypto-goose isn’t necessarily good for the crypto-gander. It depends on your level of expertise and what your needs are. Much in the same way that there are different types of bank accounts and financial tools to manage your local currency, there are several options for storing your cryptocurrency. Some people prefer to split their funds between multiple bank accounts. After all, as a good crypto-goose, it’s best not to keep all your eggs in one basket. It’s good to have the majority of your money where you trust the most.
It’s important to note that either way, online security is still the responsibility of the person owning the cryptocurrency. We believe it’s important to choose the wallet that meets your needs in the safest way possible. Whether you trust a custodian or take measures into your own hands, we all have to be on the lookout for online imposters, scams and phishers. These bad players make it their full-time job to come up with new creative ways to get into people’s accounts, so we must always stay alert and protect our security.