When storing cryptocurrency, there are a wide range of options to choose from. The most popular and common form, particularly for newer investors, are third party custodial storage services – including good old-fashioned exchanges. While it is hard not to recommend storing your digital valuables on exchanges, particularly when many of them employ rigorous layers of security and regular audits, the current landscape of the cryptocurrency industry might make you a little wary of keeping all of your eggs in one basket. For institutional investors whose portfolios may contain a significant amount of cryptocurrency, it is even more crucial to look at multiple ways of storage to protect your investments.
Hot Storage
Online wallets
Third party custodial wallets are different from simply leaving funds on an exchange, as their primary function is the storage of digital assets. As these require an internet connection and could potentially be unsecure, online wallets are also known as ‘hot wallets.’ Most likely, if you’ve had to transfer crypto to another person or to another exchange, you have already used a hot wallet before. They can come in a few forms, the most common of which are mobile apps and web-based wallets. Some wallets are specific for each coin – Ethereum and Solana, for example, are tightly-integrated into certain wallets made for their infrastructure.
Hot wallets are the easiest to use and the best form of storage for newer investors, even if it is for larger amounts of cryptocurrency. The reason for this is because these wallets have a shallow learning curve, meaning they are very easy to use and can help introduce a new investor into the ins and outs of basic crypto storage. Online wallets give an investor control over the handling of their assets and, best of all, online wallets are almost always free.
Of course, the glaring issue with online wallets is the fact that your crypto is being stored on the web, which is inherently risky as you run the possibility of your funds getting hacked or being accessed by a malicious third party. While almost all dedicated online wallets are heavily secured and a majority of crypto investors use these wallets with little no issues, if there is a significant amount of assets that need to be managed, investors should look to a couple of alternatives to keep their investments protected.
Dedicated custodial services
If you are an organization or an institutional investor, then it might be best to look at dedicated third party custodial services; as this focus of this article is on the importance of self-storage, we will only cover dedicated custodial services in brief. There are a few entities capable of handling crypto custody, exchanges included, and these can be very advantageous for institutions, hedge fund managers, or high-net-worth individuals. Part of the security that these services provide is that service level agreements (SLAs) dictate the terms regarding storage and access of the funds, adding to another level of robustness that simply leaving your funds on an exchange or wallet provides. Furthermore, as there is a strict record-keeping process with custodial services, it gives you and your organization a level of autonomy knowing that your assets are being handled correctly.
Cold storage
The counterpart to hot storage, cold storage is the practice of storing your digital assets offline. This is by far the most secure way of storing cryptocurrency as, once your assets are offline, they cannot be accessed by anybody except yourself. Many individuals with sizeable investments often keep their investments in cold storage, sometimes locked away in safes, and many exchanges – including VirgoCX – utilize cold storage as another level of security for portions of their liquidity.
Physical wallets
For individuals, one of the best investments they can make to keep their digital investments safe is by utilizing cold storage hardware wallets. These are physical devices that vary in size but are almost like portable hard drives that carry digital signatures containing your cryptocurrency. These are very popular among seasoned investors because of their portability and high security – once you’ve stored your crypto and removed the wallet from your computer, it is completely isolated and unable to be accessed by anyone.
While they are less streamlined than a web-based wallet or a mobile app, they function very similarly. Once a hardware wallet has been connected to your computer, it can generate an address that can send and receive crypto. Of course, losing a hardware wallet is a very real possibility, which is why most hardware wallets have a recovery phrase. This allows you to recover your assets in the event you would lose the device itself.
An alternative to hardware wallets that could potentially be even more secure are paper wallets. You can use certain websites to generate private and public keys which have your assets stored on them and – like the name might imply – you can then print these keys out onto a piece of paper. What makes these potentially even more secure than a hardware wallet is that only the user that has access to these keys can access the assets; there isn’t any connection to a computer nor needing to access the internet for a brief period of time. Many users store these paper wallets away in safes or safety deposit boxes as banks, and it does away with potential user error as there is no interface other than the key printed onto the paper itself.
Howeverr, although cold storage options provide the highest level of security, they also require the most amount of responsibility. Like keeping cash in your wallet or tucking it away under your mattress, you have to be organized and constantly be cognizant of the different passwords, keys, and phrases you are using for each form of storage. As no one is there to manage the funds for you, if you were to inadvertently lose the keys or they get destroyed in a flood or fire, you run the risk of losing your assets forever.
With the current landscape of the crypto industry, investing some time into learning how to maximize each self-storage option could be key in protecting your digital valuables during a period of uncertainty and compromised security. Get to know your needs and you can ultimately decide which form of storage is right for your investment.