One of the primary benefits of cryptocurrencies, when compared to fiat currencies, is the self-governance that crypto users have over their assets. Thanks to this feature, crypto users no longer have to rely on third-party entities such as banks to manage their assets.
While this aspect of cryptocurrency brings many benefits, such as protection from censorship and asset freezing, it does come at a certain cost. Maintaining the security of crypto assets is in the hands of each user.
Crypto assets are usually stored in crypto wallets. Every time a new wallet is generated, two keys are created: a public key and a private key. The public key is used as an address for receiving crypto assets. The private key belongs to the wallet owner, and it’s used to verify ownership as well as to get access to or send crypto assets.
Read on to learn how to keep your crypto safe.
The Best Way to Store Crypto
There is no single best way to store crypto. Instead, a number of crypto storage solutions are available today, including the following.
- Crypto exchanges
- Hot wallets
- Cold wallets
Now let’s take a closer look at each of them.
Crypto exchanges are markets that allow you to use real money ($AUD) to buy cryptocurrencies, trade one type of cryptocurrency for another, and convert crypto to fiat.
The majority of popular exchanges, including Coinbase and Binance, operate like any other trading platform (that is, they don’t use blockchain and are centralized). That’s what makes them popular, as they are simple to use and convenient. Decentralized exchanges with direct peer-to-peer transactions exist as well, but they are less convenient to use.
Each user account on a centralized exchange has its own wallet. However, putting your cryptocurrency on exchanges usually implies that the company keeps possession, or “custody,” of the assets, and users cannot access the private keys.
This is referred to as a custodial wallet, and it requires you to trust the company behind the exchange to protect your funds and follow the proper security protocols. Even though some exchanges are diligent and ethical, a single bad one can devastate the entire sector, such as the infamous FTX.
Hot wallets are software-based online crypto wallets. Because they’re connected to the internet, your account on a cryptocurrency exchange qualifies as a hot wallet as well (the custodial kind).
Non-custodial or self-custodial hot wallets, on the other hand, are internet-connected wallets in which you manage the private key and seed phrase for your crypto assets yourself. The private keys are kept in the app.
The ability to access a non-custodial wallet using a web browser, computer app, or mobile app is easy, but it also makes these wallets subject to hacks, fraud, and other cybersecurity threats.
Cold wallets are offline wallets, which makes them the safest way to store crypto. Nowadays, this often refers to physical devices, which can range from a USB drive to specialized hardware with custom security and accessibility capabilities. Paper wallets are another type of cold wallet crypto storage, albeit a very fragile one.
This alternative storage option is available to NFT users. When an NFT is stored on-chain, all of its data exists on the blockchain itself. In turn, this allows the network users to completely verify each NFT. On-chain storage is rarely used as it requires the blockchain to support and process large amounts of data that isn’t essential for its operations.