You can use one or more ways to store your cryptocurrency such as Bitcoin, Ethereum, and other alt-coins. Each method carries its own risks, some much more than others. We’ll take a brief look at the following ways:
- Online wallet
- Removable media or hard drive
- Specialty hardware
Firstly, keep in mind that you’re not actually ‘storing your coins’. You only hold the private keys that verify your ownership or entitlement to the cryptocurrency. If yo u don’t know this, then you need to read the Beginners Guide to Bitcoin and Cryptocurrency that’s available through this site.
Hot vs Cold
There are two high level categories of storage: hot and cold. Hot storage is a storage method that connects the storage facility to the web. It allows for quick access and transfer of crypto. Cryptocurrency held in an exchange is an example of hot storage, as is your PC wallet that is connected to the net.
For security reasons some exchanges do hold part of the total funds in cold storage at all times- although you won’t see this and it won’t be apparent.
Here’s a short overview if you can’t be stuffed reading the rest of the post!:
Ok, so let’s explain some of the methods for storing your cryptocurrency.
An only wallet is software that is hosted by a third party that allows you to access, store, or transfer your currency. Online wallets allow you to transfer your coins to a wallet that is hosted by another party i.e you access it through a web site.
You are essentially placing your trust in a third party. Without thorough checks and with little regulation, it’s difficult to say which online wallet assures the highest level of security.
Online wallets do offer the convenience of anytime access, from anywhere.
- Provides easy access through a website
- No need to remember long seeds and usually offers two factor authentication
- Easy to use and navigate
- Requires little technical knowledge
- Can reset passwords
- Stored on a third party hosting service by a third party
- Little to no regulation
- Easy target for hacking
- Account can be compromised like any other online service
- What’s stopping the third-party from packing up?
Don’t understand any of this? Read the beginners guide to cryptocurrency before you read on.
Most security issues historically have occurred at exchanges. Prone to hacking (and fraud), exchanges are regarded as the least secure method to store your currencies. They make good targets for hacking unfortunately due to their popularity.
It is recommended that exchanges are only used to do what their core function is- exchange currency. Only leave a liquid amount that you need to trade the currency, then transfer the residual using your favorite storage method.
- Highly liquid
- Low fees to transfer between coins
- Access to a large number of altcoins
- Offer multi wallet capability (storage for multiple cryptocurrencies)
- No technical knowledge required to setup
- Offer two factor authentication
- Prone to hacking or fraud
- Little to no regulation
- Access can be taken away without notice- regardless of the reason as third party has full control
- You don’t control or own your private keys
- They control the coins in case of crypto forks and may not relinquish additional coins earned from forks
- You don’t receive any ‘gas’ from coins that generally do payouts – somewhat like a dividend (e.g. NEO pays gas on the NEO coins you would otherwise hold in your own wallet)
Offline methods are the most secure ways to store your cryptocurrency. Once again though, they also have their pros and cons.
Personal Storage Device
Cryptocurrencies can be ‘stored’ on removable media such as USB stick or memory card, CD, or external hard drive. The best things about these is you can store them offline anywhere, in a safe, or a bank deposit box. It is less convenient as it requires either transfer of large data files or certain files from the wallet software.
Requirements for different currencies can also vary. However it doesn’t require any advanced level of technical knowledge. It’s either simply storing your wallet files, or encoded private keys.
PC or laptop storage
Another good option is to leave them on your PC. However most PCs are connected to the web. They are also prone to hacking, corruption and errors, loss of data, malware and viruses, etc. Corrupted the hard drive on your PC? You’ve just lost all your precious coins. Dropped your laptop? They’re gone.
PCs require you to install relevant wallet software or applications, with most only compatible with certain cryptocurrencies. On top of this some applications do require a decent level of technical knowledge.
- Security levels dependent on you- from least to highly secure
- Can use further encryption methods and software
- Can create backup options
- Able to connect online easily to transfer coins- although not as convenient as through online exchange/wallet
- Highly inconvenient
- Time consuming process to use or backup the funds
- Prone to data corruption, lost passwords, malware, keyloggers etc
- May require multiple applications or software for alt-coins (i.e. a separate client is required to run each alt-coin you own)
- Risk of being stolen or damaged (data erosion may also occur depending on the storage device)
- May require repeat backup process every time funds are used
A paper wallet is a basically a sheet of paper which contains the printed version of your cryptocurrency private and public keys. There are multiple options with paper wallets also. For example you can get them as gift cards or bank cards- which allow someone to transact with the funds only once, or you can create your own print out at home.
Remember that you don’t store coins as such, and it is through the private keys that ownership is verified. So to access the currency you only need to input the private (withdraw) or public key (to deposit) that is printed on the paper.
Paper wallets can easy be created using online and downloadable software. However security, once again, can be hard to determine for third party software.
Securing your paper wallet will be like securing physical cash in fiat currency. You’d keep it somewhere secure, where it is less likely to fall into the wrong hands. However keep in mind that a person would only needs to take down the private key (as with a credit card number) to be able to transact with the coins (just like a person doesn’t need the physical credit card to transact but only know the credit card number, date, and security digit at the back of it).
- One of the most secure options
- Easy to store and up to you how you store it
- Easy to create and back up
- Can backup in multiple locations
- Can easily provide as a gift
- Highly inconvenient, especially if using the funds for regular exchange or transactions
- Have to protect from damage, theft and prying eyes
- Reliance on third parties to convert to printable code
- Requires bit of technical knowledge without using online software
Here’s a great video found online that goes on how to create and use a paper wallet for Bitcoin.
With growth in blockchain technology as well as in the alt-coin markets, comes innovative solutions. Hardware storage devices (hardware wallets) specific for cryptocurrencies are one of these solutions.
Hardware storage devices (hardware wallets) specific for cryptocurrencies are the safest and most convenient of all these solutions.
There are multiple hardware options available these days. So it’s just a matter of finding one that is compatible with your coins, offers sound security measures, and comes with decent application that offers a simple interface and convenience.
- one of the most secure options
- more convenient that removable storage device or paper
- offers built in encryption
- offers backup options through paper
- some offer protection or backups in case of damage or theft
- Can be limited in options based on your location (may not be available where you are)
- Further backups maybe required as redundancy options
Guide to storing your cryptocurrencies securely
Okay, that’s all good. But what do I do to store my cryptocurrency?
As you have read, there are multiple methods to secure your cryptocurrency. The optimum method is really up to you and based on your personal situation and what you are comfortable with.
Offline methods do offer the most secure option though especially hardware designed for this purpose specifically.
The following is a quick guide to creating your own storage process, without outlaying cash for a cryptocurrency hardware device:
- Store small amount for transactions in an online wallet or PC wallet connected to the web. Remember, online wallets will allow you to access your currencies from anywhere.
- Store the bulk of your funds in an offline wallet, first use PC software, and then backup onto a removable storage device.
- Make sure PC is running virus and malware protection, and is free of key loggers
- You can create a further backup either using a paper wallet and/or USB stick
- Use password protection or encryption on your storage devices
- Store the paper wallet/USB stick in a safe
- If you’re adamant you could store the paper wallet or USB stick at a bank security deposit box
You can remove most of these steps by using a hardware wallet which normally allow various backup options.
As you can see several options exist for storing your cryptocurrency these days. However we are still a while away from quick, convenient, online storage solutions.
Achieving the highest level of security is time consuming. It can even seem daunting especially if you only have a small amount to be looking after, but not impossible. Also, and once again, remember that the person that has access to the private and public keys is the actual owner of the coin. So always secure your keys.