Cryptocurrency Storage: The Good, the Bad, and the Ugly

Cryptocurrencies are becoming increasingly popular, as investors flee to store their wealth in these safe havens. Unlike fiat currencies, cryptocurrencies are digital and require special storage methods to keep them secure.

Not your keys, not your coins!

Indeed, the recent downfall of many a cryptocurrency platforms have undermined the trustworthiness of 3rd party custody, ever reinforcing the above adage that if you do not own the private keys that unlocks your coins, those assets essentially aren’t yours! However, self-custody can be tricky; or, is it?

The Concept of Digital Keys

A cryptocurrency wallet is a software that stores private and public keys, enabling users to send, receive and store digital currency.

While the public key is made publicly known, the private key acts as a signature that gives ownership of the digital asset. Only the owner of the private key can sign transactions with it, and the public can verify the signature on the blockchain using the corresponding public key. However, these keys are only as secure as the device or platform on which the wallet operates; any loss or compromise of a private key can result in the permanent loss of the digital asset. Hence, the art of cryptocurrency storage is really about safeguarding the private keys to your digital assets!

Cold Wallets

The gold standard of cryptocurrency storage, cold wallets store the private keys locally, without being connected to the internet. These include:

1. Hardware Wallets: Hardware wallets are physical devices that store your private keys offline. They are designed to be highly secure, as they are not connected to the internet, making them impervious to hacking attacks. The most popular options are Ledger Nano S and Trezor. Hardware wallets offer the highest level of security, are easy to use, and offer high levels of privacy. However, they can be expensive; and if you lose your hardware wallet, you lose access to your funds.

2. Paper Wallets: Paper wallets are a physical piece of paper that contains your public and private keys. They are free to use and highly secure as they are not connected to the internet, making them one of the most secure storage options available if kept properly; but by virtue of their very nature, they can be easily lost, damaged, or destroyed.

Hot Wallets

As they are connected to the internet, hot wallets are deemed to be less secure than cold wallets. These include:

1. Desktop Wallets: Desktop wallets are free to use and offer a high level of security if you keep your computer virus-free. The most popular desktop wallets are Exodus and Electrum. However, if your computer is hacked or stolen, you could lose access to your funds.

2. Mobile Wallets: Mobile wallets are applications installed on your smartphone that allow you access to your funds on the go, such as Trust Wallet, Exodus and Guarda. The line between hot and cold storage gets blurred here; while these wallets store the private keys locally (a feature of cold wallets), their connectivity to the internet renders them to be technically classified as hot wallets. An interesting wallet that aims to circumvent this problem is AirGap, which offers a two device approach — an air-gapped vault installed on a dedicated smartphone that is completely offline; and a companion application, the AirGap Wallet, that is installed on your everyday phone through which the vault is accessed, without storing the private key itself. Some of these wallets, including the ones mentioned above, offer an in-app option for staking your coins despite being in cold storage, enabling a secure form of passive cashflow generation. While offering a reasonable degree of security (as the private keys are stored locally), they can still nonetheless be subject to hacking and manipulation by malware. To learn more about staking and growing your digital wealth while safely taking custody of your own funds, check out my previous articles here!

3. Online Wallets: Although perhaps the most convenient form of cryptocurrency storage, funds are entrusted to the care of third-party companies, which waive full autonomy over the management and expenditure of the said funds. Perks include the ability to passively grow your portfolio with various offerings like staking, liquidity mining, and earn at attractive APYs; plus the flexibility of trading your coins with good liquidity on an exchange. However, the recent bear market has borne such a great witness to the ignominious collapse of a plethora of cryptocurrency platforms, that it is almost too difficult to disregard the adage “not your keys, not your coins”, and to wholeheartedly entrust your hard-earned assets to third party custody. Few fintech startups have fallen prey to the misappropriation of investors’ funds, such as the now infamous Hodlnaut which blatantly lied to investors about having nil exposure to the Luna/ Terra Protocol only to collapse a few months later; and Finblox which is still holding early user’s funds hostage in what is known as ‘reserved funds’, while silencing all communication on this sensitive topic in order to preserve its reputation for continued operations. Few platforms remain that have withstood the test of time, and which I continue using myself — noteworthy mentions include Binance, Nexo and Cake DeFi — all of which will nonetheless still be expected to have their own shares of FUD, and whose trustworthiness and accountabilities will remain to be seen.

Final Thoughts

While the prospect of an upcoming potential bullish market is exhilarating, it is vital to remain level-headed with regards to the fundamentals of cryptocurrency storage — the very core of an investment portfolio that guarantees its security and viability. Your private key must be kept secure — anyone having it will have unequivocal access to your funds. It is up to you whether to keep your stash in a hot or cold wallet, depending on your investment preferences and risk tolerance. If resorting to a hot wallet, and reasonably for doing so out of convenience and trading needs, always do your own diligent research to avoid falling prey to cryptocurrency scams. Enjoy amassing your digital wealth safely in preparation for the next bull run!