How to safely store cryptocurrency?
To become part of the crypto industry, a user must own certain cryptocurrency assets. However, Bitcoin or Ethereum cannot be carried in a pocket like paper bills, so one of the first problems for new crypto owners is choosing where to store their coins. We will tell you what storage methods exist and how to store cryptocurrency.
What is a crypto wallet?
Since digital assets have no tangible counterpart, storing them differs from storing cash and other valuables. In essence, storing digital currency is keeping records of transactions on a specific foreign currency account. The financial company keeps this accounting.
The situation with cryptocurrency is different since records of transactions for each account are stored on the public blockchain. However, unlike PayPal, a special interface is required to conduct an operation through the blockchain and, most importantly, a private key, which confirms the transaction. Therefore, cryptocurrency storage methods should be understood as methods and tools for storing the user’s private keys and personal data and not accounting for transactions (which is already maintained in the blockchain).
The functionality of crypto wallets is fundamentally different from companies serving accounts with centralized digital assets. These companies independently keep records of transactions. In that case, wallets only provide an interface for conveniently making transfers, conversions, and other operations, and the storage of private keys itself can be “hot” or “cold”.
Сryptocurrency types of wallets
A hot wallet is the storage of digital assets in various online wallets, specialized applications on exchanges, and trading platforms. In a hot wallet, you use remote software. The main advantages are:
- Availability. Platforms and their interface are clear even for an inexperienced user;
- Ease of sending coins. You can transfer funds with one click. Just the sender and recipient addresses are enough.
- The technical issues of each transaction are resolved by the company that supports the wallet. However, it significantly speeds up crypto settlements, so using “hot” wallets is better if the owner often transfers cryptocurrency.
However, the main vulnerability of hot storage lies in the Internet connection. A private key and other personal data stored on a PC or smartphone can be stolen by attackers using viruses or malware. In addition, some wallets generally store this information on remote servers.
Check the server security and data transmission channel before storing crypto in a hot wallet. There are different types:
- Online wallets. To run them, you should connect to the Net and use an updated browser. All the functionality for conducting transactions is available directly on the company’s website: convenient but highly unsafe. The private key and personal data of users can be stored both on the device and on the company’s servers. In the second case, when choosing a wallet, you need to evaluate security measures, work experience, and feedback about its developer because the safety of funds will depend on him.
- Desktop crypto wallets. They differ from the previous ones in that work requires installing a special application on a PC. Desktop software can be safer than online wallets because some developers provide local data storage on a computer rather than on their servers.
- Mobile crypto wallets. Functionally almost identical to desktop applications, the only difference is that you can install such wallets on a mobile device and carry out payments at any time and place with a network connection. User data is stored locally, but this is a disadvantage since smartphones are still more vulnerable to malware capable of leaking keys and addresses to cybercriminals. Nevertheless, they are in demand for storing small amounts and conducting fast transactions.
Account data and the private key are stored offline; it is physically impossible to access them via the network. It has the following features:
- Complete protection against hacking and data interception;
- Manual confirmation of transactions.
It is inconvenient to enter the private key if you have to make several dozen transfers a day. There is less software for cold storage on the market than hot counterparts, but this is the only way to 100% protect your crypto assets from hacker attacks. There are several ways of cold storage:
- Paper wallets. The easiest way to save your private key without the risk of theft or interception is to write it down on a piece of paper. Then, the user rewrites the key in a notebook and manually enters it when performing a cryptocurrency transaction. More advanced users print out the private key as a QR code and scan it to confirm the transaction.
- Hardware wallets. A hardware wallet is an advanced encrypted and password-protected flash drive that stores all users’ account data. The user needs to connect the hardware wallet to the network to confirm the operation, and the key is stored in a secure environment. It is simply impossible to access it via the Internet.
Tips how to store cryptocurrency
To protect crypto assets (especially if hot storage is used), you can also use the following methods:
- Fragmented private key. Divide the security key into several parts and store them on different drives. In the same way, you can strengthen the paper wallet. Cut the printed key into several parts and distribute it to different friends, or send it to different banks for storage. All parts of the code are required to confirm the operation.
- Multi-signature wallets. Some developers offer multi-signature hot wallets. A multi-signature means that to send a transaction, several people must confirm it. That is, even if attackers intercept the private key, they will not be able to withdraw money from the account until your trusted person confirms the operation.
- One of the safest but not the most convenient ways to save cryptocurrencies is to diversify them. Instead of 2 wallets, divide the funds between 10. This will reduce the number of losses in case of hacking, and small amounts do not attract the attention of hackers.
There are a large number of different types of cryptocurrency wallets available now. But they all work according to the same principle. The more convenient a wallet is to use, the easier it is to hack. Conversely, the less convenient it is to use, the safer it is. So choose a wallet that suits your needs!