Getting into crypto for the first time can be intimidating. It’s a relatively new asset class, and while it is rapidly gaining in popularity and mainstream acceptance, it is still an area where, if you’re new to it, the level of detail and tech involved can be overwhelming.
One of the common questions is “where do I store my purchases?” As digital-only resources, understanding where the crypto actually goes is important, both so you can access it again at a later date, and so that you’re storing your assets securely. This is important because crypto attracts a lot of criminal activity, and you want to make sure that you’re protected from theft and scams.
There are three ways that you can store your crypto. One is at the exchange itself. Crypto exchanges are, like stock exchanges, places where digital assets are traded. Once you’ve bought something on one of them, it remains your asset, and if you don’t move it somewhere, it stays on the exchange until you’re ready to trade it or otherwise dispose of it.
For investors that only have a small amount of digital assets as part of an overall investment portfolio, exchanges can seem to be appealing as a storage option as they are hand’s off, and the investor is likely to simply hold on to the asset until they’re ready to sell it, rather than make active use of it.
For people who are more deeply into the crypto world, there are two options for getting the currency off the exchange and making them available for instant use as desired: they’re called “wallets”, for obvious reasons, but the difference between the two is quite significant.
What is a “hot wallet”?
A hot wallet is the most common kind of crypto, and it’s really just a piece of Internet-connected software.
Imagine how Dropbox holds your files online, and Gmail holds your email. A hot wallet’s like that, only it holds your crypto currency (and NFTs, if you have those), and allows you to access it online anywhere, any time.
Hot wallets have been largely credited with being the reason that crypto has accelerated in mainstream popularity. They’re a low-touch solution for a pretty technical area, allowing just about anyone to invest in crypto with the maximum of user—friendly ease.
Another big benefit to hot wallets are that they’re free. Often they’re offered by the exchanges themselves (or the exchange partners with a third-party platform), and you can be set up and going with them almost instantly. Much like PayPal, really, only that’s a digital wallet for real currency, and these hot wallets are for digital assets only.
The problem is that hot wallets are nowhere near as secure as just about everyone would like them to be. The list of hot wallet hacks is long and devastating and can affect just about everyone. Earlier this year, the DeFinance Capital founder lost $1.6 million in a hack, and that’s one of the savviest and most experienced people in the crypto space.
Because every hot wallet has a public address (that’s how you exchange crypto back and forward between them), and always online, hackers have a plethora of tricks up their sleeve to break in and transfer the crypto from your wallet to theirs. The worst part about it is that recovery of stolen crypto assets is almost impossible, and even if it were possible, law enforcement is usually out of their depth in this field.
Hot wallet examples include:
- MetaMask – a hot wallet that specialises in Ethereum, and has the added benefit of allowing you to invest without having to download the complete blockchain.
- Coinbase Wallet – Well regarded as one of the most secure wallets (largely because it hosts your wallet’s private keys, which facilitate the transfer of funds, to your mobile device alone), Coinbase’s other benefit is that it has a interface that is no different from a standard banking app, and is fully featured for a wide range of coins and other assets.
So, is the solution a “cold wallet
A cold wallet does address the underlying security risk that you find in hot wallets. A cold wallet is a physical piece of hardware (imagine a USB drive) that stores your digital assets. Until you physically connect the device to a computer and the Internet, there is no way to assess the crypto online.
Cold wallets generally cost money. A good one will set you back around $200, which is significant for storage, but that comes with a lot of technology designed to make it as secure and rugged as possible, so the data doesn’t degrade at the rate it might with a USB or other cheaper storage options.
There’s a reason that it’s important that the device not fail and corrupt: the cold wallet is the only location that the crypto is located. If the cold wallet is damaged, lost, or stolen, then the crypto is gone. It might not be accessible to anyone else (cold wallets have passwords and unless you’ve written it down and the thief has taken that too they’re not going to be able to break in), but all that means is that the crypto is lost for good.
Just read this story about a journalist that accidentally threw away $7.6 million in Bitcoin. This is the risk with cold wallets.
There is a further risk that a cold wallet can be compromised (which is why you shouldn’t buy them second hand, ever), and in that event, set up so that when or if you do connect your wallet to the Internet, some malware on the device will automatically bleed the crypto to the hacker’s wallet instead.
That being said, if you buy a cold wallet unused from the manufacturer, keep it safe and secure, and memorise the password, then it is a vastly safer way to hold crypto than on hot wallets.
Cold wallet examples include:
- Ledger Nano X – This USB-shaped wallet is notable because it allows for more than 1,800 different types of currencies and tokens, and features Ledger Live software on the device, which is an easy-to-use interface for the management of assets.
- Safepal S1 – One of the most secure cold wallets, even if your Safepal S1 is stolen, and even if the criminals get the password somehow, you can still have the two-factor authentication to back it up. They’d need your phone as well, then. The Safepal S1 also has plenty of bonus features, including a controller on the device to physically manage it and a QR code scanner.
So should you just not invest in crypto?
The security challenges that come with crypto are scary, but then, think about this – physical currency is a fundamentally insecure form of money, and it’s incredibly easy to modify ATMs to steal people’s card data. Rather than avoid using money, we’ve found ways to improve security and learned best practices to be as secure as possible. Crypto is an excellent investment opportunity and, increasingly, a genuine replacement for other, traditional forms of currency. It’s going to become more standardised and everyday over time and so, rather than avoidance, the better solution is for people to do their research on security best practices and, whether it’s using a hot or cold wallet, take the right steps to protect their investments.