How to Store Your Cryptocurrency Safely in 2020
February 28, 2020
We covered how to buy cryptocurrency in this guide, but equally important is what you do after you have acquired any crypto assets. Storing your cryptocurrency safely is of utmost importance and something that should be of top priority by every crypto investor. This article will guide you through how to protect your funds, how to choose the right wallet, and what you need to consider to stay secure and prevent theft or losses.
If you already own any type of cryptocurrency, chances are that you have also interacted with a cryptocurrency wallet. They are essentially a software program that lets you send and receive digital currencies, and stores your public and private keys. You can also use a wallet to monitor your balance of crypto assets.
In general we categorize wallets into either hot or cold.
- A hot wallet is connected to the internet and can be accessed at any time
- A cold wallet stores your funds offline, and is thus not connected to the internet
Typical hot wallets are exchanges, online cloud based wallets, and most mobile and software wallets.
The most widely used cold wallets are hardware wallets, but also paper wallets and other offline data storage devices.
People actively trading the cryptocurrency market might prefer to use a hot wallet because of the accessibility it provides, while long term investors and other people that don’t require ready access to their funds usually prefer a cold wallet because of increased security.
Types of Wallets
We can generally put cryptocurrency wallets into four distinctive categories: paper, cloud based, software, and hardware wallets.
A paper wallet is most often a physical copy or print of your public and private keys, and is therefore considered cold storage because it is not connected to the internet. You can sometimes generate a paper wallet from a software wallet, such as a digital file you can print or save somewhere safe. To use your paper wallet you can either import the digital file into a software program or scan the QR code with any compatible mobile application to get access to your funds.
There are many different paper wallets that exist today, and for the most popular cryptocurrencies you have probably several options to choose between. MyEtherWallet is a very popular wallet for Ethereum and all supported ERC-20 tokens. If you want to store your Bitcoin on a paper wallet, you can generate one from the Bitcoin Paper Wallet website.
Paper wallets are considered to be cold wallets, but they do come with risk specifically for this type of wallet. If you have your private keys on a physical print you must make sure that it does not get damaged in any way. They are also easy to copy, so you will need to keep them in a safe place that other people don’t have access to. It is good security practice to have multiple copies and store them in different locations.
Some people keep electronic copies of their paper wallet on a computer, but this is obviously a bad idea for several reasons. As long as your computer is connected to the internet, it is essentially a hot wallet. If you store your private keys on a paper wallet you should always make sure it is kept offline.
Cloud Based Wallets
Cloud wallets are always hot wallets. With these types of wallets you can access your crypto assets from basically any computer or device with internet access. You should always consider the risk of having your private keys controlled by a third party before sending your cryptocurrency to a cloud wallet. Some of the popular wallet providers today are:
Software wallets are downloadable programs that you install on your computer or mobile phone. Since your computer or phone is in most cases always connected to the internet, such wallets are considered to be hot. Hackers and computer viruses are becoming more sophisticated every day which is something to consider before you decide to install a software wallet.
This type of wallet has often a very user-friendly interface to manage your digital assets, and some wallets also lets you access your cryptocurrency from different devices at the same time. Some of the popular software wallet providers today are:
- Electrum wallet
Hardware wallets are considered cold wallets and provide one of the highest levels of security today. These wallets store your private keys on an encrypted physical device which might look like a USB memory stick. Some of the wallets today lets you send, receive and manage your cryptocurrency from a web interface or software program on your computer, all while still being considered a cold wallet.
The user experience has become better in recent years, and it is now fairly simple to perform transactions even for beginners. Generally, you just plug the device into any computer or mobile phone connected to the internet, and you are ready to send or receive cryptocurrency. These wallets are considered to be one of the most secure ways of storing digital currencies today.
The most popular hardware wallets on the market today are:
It is important to consider from where you buy a hardware wallet. Best practice is to always buy directly from the manufacturer to reduce the risk that your device has been tampered with. Even when doing so you should also always reset the device before you use it.
After setting up the hardware wallet for the first time you will likely be asked to make a backup of your private recovery seed phrase. In case you lose the device, or it gets damaged in any way, you can restore your wallet to a new device using the recovery seed phrase. Most people write the seed phrase down on a piece of paper which they store in a secure location no other people have access to. There are also other ways to secure your seed phrase like indestructible titanium plates for example.
Best Security Practices 101
After reading this article you might consider to take ownership and control of your cryptocurrencies using a private wallet. This is a great step, but you must also consider how to keep your assets secure in the future as well.
These are some of the most important security practices to consider:
- Don’t keep cryptocurrency on exchanges unless you plan to trade in the near future
- Always enable two-factor authentication (2FA) if possible
- Don’t brag publicly about your crypto holdings which could attract thieves or burglars
- Use a hard to guess pin code with your hardware wallet
- Make sure to avoid malware and reduce the risk of getting viruses on your computer
We hope this article was a valuable introduction to how you can store your cryptocurrency safely today. Security is something that should be on top of every crypto investors priority list, and it is important to always consider the risk of your wallet being compromised.
Disclaimer – This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.
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