A professional cryptocurrency hodler might find the answer to this question quite obvious – you have bought your first Bitcoin, but where are you going to keep it?
But if you are a novice in the industry, there are a few basic things you need to understand when it comes to storing cryptocurrencies.
If we speak technically, cryptocurrencies can’t be stored anywhere. Rather, you store the private key which allows you to access and send your coins. Thus, the important thing is to efficiently store your private key to keep your coins safe.
There are three primary ways in which cryptocurrency can be stored: software wallets, hardware wallets, and custodial wallets. Furthermore, the storage can be either hot or cold.
Today’s post will walk you through the various types of cryptocurrency storages and why you should use them.
Software wallets are nothing but a software solution that can be made to run on any hardware including a laptop or a smartphone. It is also considered one of the handiest forms of cryptocurrency storage. Software wallets are hot wallets and they encrypt and protect your private keys.
Software wallets are free to download and use. However, they do come with a few entry barriers. In order to use a software wallet, you will have to set them up, generate an address, after which you can start receiving or sending cryptocurrencies. Often smartphone wallet apps come with an on-screen guide to help you out with the initial set up.
Nevertheless, software wallets, especially the ones available/used on smartphones aren’t entirely secure. In fact, the level of security is influenced by the methods the software wallet apps use to secure coins using the phone’s hardware.
Also, keep in mind that a lot of fake software wallet apps have been popping around lately. They can make off with your cryptocurrencies as soon as you add them into the app. As smartphones are always online, there is also an increased risk of attack vectors like phishing.
As of now, hardware wallets are the safest way of storing cryptocurrencies because they store your coins offline. Unlike software wallets, hardware wallets are physical devices that protect both your cryptocurrencies and private keys. Often, hardware wallets look like USB flash drives that come with a small screen and a few buttons.
You only have to connect the hardware wallet to the internet whenever you need to make a transaction. Therefore, even if a hacker targets you, he will only have a small window of opportunity. Nevertheless, hardware wallets can be a headache if you are a person who constantly keeps moving coins around.
Additionally, though hardware wallets being cold wallets aren’t immune, they are pretty safe from hackers. There are chances that they can be infected with malware and might trick the user into sending coins to scammers.
Also, as you are buying a physical device, you need to make sure that you are buying a legit version and not a tampered one.
Hardware wallets are specifically a great option when you have plans of storing your cryptocurrencies for long term.
Custodial wallets are the most complicated among the lot. Nonetheless, it is also one of the first cryptocurrency wallets that people actually started using. A custodial wallet is nothing but when your private keys are stored by a third-party custodian.
For instance, when you buy cryptocurrency through exchanges like Bithumb and Coinbase, your coins are stored in their exchange account. Actually, what happens is your coins are stored in a custodial wallet provided by that particular exchange.
Custodial wallets like software wallets are hot wallets. This is particularly good in some cases as all you have to remember is your login details to access the platform. The third-party custodians perform all the measures to make sure that your coins are protected.
However, storing cryptocurrencies in custodial wallets come with the disadvantage of not having complete control over your coins. For example, you will have to get permission from the custodian even if you wish to move them somewhere else.
Third-party custodians that control a large number of crypto wallets on behalf of its clients will be a huge target for attackers. Thus, though custodial wallets might be a quick and easy way to store coins, it is never the safest option.
Honestly speaking, there is nothing like a perfect way of storing cryptocurrencies. It all comes down to the fact that you should choose a wallet based on how much coins you are planning to store, and how you use it.