When investing in crypto, there is often a lot to learn about such a dynamic and constantly evolving form of wealth accumulation. Perhaps one of the most fundamental lessons is how best to store your crypto coins or non-fungible tokens (NFTs) to ensure their long-term safety.
This is a point made abundantly clear during the recent overnight crash of FTX, the second largest and fastest growing crypto exchange. The full ramifications of FTX’s insolvency and demise remain unclear, but many investors who stockpiled cryptocurrency on the exchange are in danger of losing big.
In the wake of FTX’s demise, more than a few experts have emphasized the importance of always storing cryptocurrency in a self-maintained wallet rather than an exchange.
What are crypto wallets?
A crypto wallet is a device designed to store and transfer your cryptocurrency through what is called self-custody. That means that instead of going through a third party like a bank or financial institution, you can store your crypto on the blockchain and access it with a private key (more on that later).
There are two main types of crypto wallets: hardware and software. Software wallets allow cryptocurrency to be stored securely online, while hardware wallets allow cryptocurrency owners to purchase physical hardware that resembles a USB drive and store coins offline on that device. Once safely stored on the hardware, your crypto wallet can then be further secured by locking it in a vault or putting it in a vault.
One of the main benefits of both forms of cryptocurrency self-storage is that the assets are protected by private key cryptography, similar to the technology used to secure your credit card information when making a purchase online.
“Those keys secure your assets,” explains Josh Fraser, co-founder of Origin Protocol, a company that created Origin Dollar, a yield-bearing stablecoin, and Origin Story, an NFT platform. “What it looks like in practice is a string of words that basically generates this private key and secures your assets.”
In addition to hardware and software wallets, there are also so-called hosted or custodial wallets. But to be clear, these are not self-custodial wallets. Rather, it is a form of storage hosted by brokers or online platforms. And depending on the brokerage or platform, this approach can be less secure, as the FTX implosion illustrated. If the brokerage fails or does not handle your coins responsibly, the investment may be lost.
“Determining the best wallet to use really depends on the type of person you are. If you have trouble keeping track of passwords, accounts and other important information, then you should consider using a custodian wallet such as Coinbase, which can help you get back into your wallet in case you forget your password said Tyler Moebius, co-founder of SmartMedia Technologies, a leading maker of Web3 and blockchain solutions. “However, if security and privacy are your priority, then you would want to choose a self-preservation solution.”
How to create a software wallet
Setting up a wallet is a simple, straightforward process that can be completed in just a few steps.
Step 1: Select a software wallet app to use. The first step is to do your research and find a software wallet provider that you like best. There are tons of options that offer different levels of security, ease of access, customer service, and price points.
It’s also important to keep in mind as you search that some platforms offer the option to store your wallet on both your desktop and smartphone, while others only offer one of those options.
Step 2: Download the wallet app to your phone or computer. Once you’ve decided on the software wallet you’re going to use, the next step is to download the wallet app to your phone or computer.
Step 3: Create an account. The good news about many software wallets is that there isn’t much involved in setting up your account. For example, according to Coinbase, few need personal information.
Step 4: Transfer assets. Once your wallet is established, you are good to go and you can start transferring cryptocurrency to your wallet. Often this means transferring crypto from an exchange or brokerage to your software wallet.
“People usually fund their wallets using centralized exchanges like Coinbase, but you can also have a friend send you some crypto in exchange for cash or some other form of payment,” says Fraser. If you are using a centralized exchange, the best practice is to move the assets to a wallet that you control as quickly as possible.
There is an important caveat with software wallets to keep in mind. You are responsible for maintaining the keys to access the cryptocurrency assets, which can be problematic if you lose this information.
“If you choose this option, you are solely responsible for holding the cryptographic keys that secure your assets. However, the stakes are high. If you lose the private keys, your belongings are gone forever,” Fraser said.
This means that you probably want to back up your private key data in several safe places. But you also have to be careful with those backups, because anyone who has access to your private keys could steal whatever assets those keys secure, Fraser adds.
How to create a hardware wallet
Hardware wallets make it possible to store cryptocurrency offline, which can be an extra layer of security or comfort for some investors. The hardware is similar to USB drives and as such is a very mobile form of storage. The wallet can be taken anywhere. Setting up this type of wallet is as easy as a software wallet.
Step 1: Select the hardware you want to use. There are several crypto wallet options available. Some of the top names in this space include Ledger, Trezor, and Keepkey, according to Coinledger. Some hardware options are more budget-friendly, while others are easier to use or offer a higher level of security.
Step 2: Purchase the hardware and install the software required to set up your wallet. After purchasing the hardware wallet that best suits your needs, the next step is usually to install the included software, Coinbase explains. Each hardware wallet has its own software that allows you to manage the contents of your hardware wallet.
Step 3: Transfer your cryptocurrency. Once your hardware wallet is set up, you can start transferring cryptocurrency from elsewhere, such as an exchange or brokerage.
The takeaway meals
Cryptocurrency self-storage is highly recommended by experts. It allows you to manage and own your crypto assets yourself. But it’s important to do your research and carefully assess whether a hardware, software, or custodial wallet is best for you.