Now that you’re the proud owner of a shiny new piece of a BTC or ETH, you’re going to want a place to store it. But what does owning a cryptocurrency actually mean and what do I do with it? Security is everything, and the old adage goes: “Not your keys, not your crypto”. Can I trust a centralized exchange like Coinbase to hold my cryptocurrency or do I want to move it crypto cold storage. Read on to learn more.
Owning cryptocurrency
You can’t physically hold crypto, so what does ownership boil down to? You own an address where your crypto is ‘stored’, and this is all recorded on the blockchain. This address is your public key, which others can use to send you other cryptocurrencies. Or you can use as well as the destination address to transfer your crypto to another exchange or wallet.
The way to truly own cryptocurrency is to be in possession of the private keys, which allows you to access your crypto to send out of the address or to authenticate the transaction.
Storing your Crypto on an exchange – easy, less secure
Exchanges are centralized, so if you simply leave your cryptocurrency on your exchange you are giving up custody of the asset. With Stocks and traditional money, you need a centralized entity to keep track of and store your typical financial assets, because that’s how the system was built. Crypto on the other hand, doesn’t require a centralized entity to hold your assets. Balances are all stored on the public blockchain, which many entities are constantly updating and managing. No one person or group is in control of everything.
If you followed my previous post on how to buy your first cryptocurrency, you now have BTC, ETH, or whatever you decided to purchase sitting in your exchange wallet in Coinbase. I generally trust Coinbase, and as long as the security features are enabled like 2FA your cryptocurrency is relatively safe.
However, if Coinbase got hacked, your stored crypto is at risk since you don’t actually have possession of it. Technically Coinbase is holding the private keys to your crypto. They’ve created separate buckets which you access through your login and password, but if some crazy employee hijacked the whole company, they could technically run away with everyone’s crypto.
Advantages of an exchange wallet:
- Very convenient
- Cryptocurrency is closes to exchange so you can trade easily and quickly without transfer fees
- Can also be connect to USD Bank account
Disadvantages of an exchange wallet:
- You do not hold private keys
- Exchange can get hacked
- Exchange can hold your crypto assets for their own reasons
Storing cryptocurrency in a digital wallet- more secure
The next, more secure method of storing your cryptocurrency is to use a digital wallet that you own and manage. And by ownership, we are referring to the concept of holding the private keys so that you’re in full control.
The digital wallet I use is Metamask. This is specifically an Ethereum wallet, only to be used with ERC20 tokens. These are concepts I’ll explain in another post. You cannot store other coins like BTC in Metamask. This is also the gateway to Decentralized finance, as Ethereum is the main application of Defi and Decentralized apps today.
Another wallet I have, but don’t use as much is the Coinbase wallet, which is a wallet that’s owned by you, but is not connected to the exchange. Most of these wallets are software based and tied to your desktop or mobile device.
Advantages of digital wallets:
- Ownership of private keys
- Can use anywhere if on mobile
Disadvantages of digital wallets:
- Not as secure as hardware wallets, the digital nature allows them to be the target of hacks or social engineering
- Because you own your keys, you are now responsible for security (may not be a disadvantage in the eyes of some)
Storing cryptocurrency in a hardware wallet (cold storage) – most secure
Hardware wallets add a physical component to the digital wallet. You have an actual device that requires you to interact physically with the device (usually by entering a pin), before being able to access your cryptocurrency. This is the most secure because an opportunist would have to be in physical possession of your hardware wallet to access your crypto. This device also generates and manages your private keys.
Advantages of hardware wallets:
- Most secure method of storing your cryptocurrency assets
- Cannot be hacked digitally, physical aspect of authentication process
- Also known as ‘cold storage’
Disadvantages of hardware wallets:
- Time to access crypto increases by nature of additional security layers
- Cannot trade quickly on market indicators
- Technical learning curve
- Cost of device
My Recommended Hardware Wallet – Trezor Model T
I personally use a Trezor Model T and I’m very happy with it. It’s very easy to set up and use and it also is super secure. I’ll post an in depth review on the product soon.
Hardware wallets in conclusion
You will have to strike a balance between convenience and security. Likely you will use multiple methods of storing your crypto. If you don’t need to access it for a long period of time, it’s definitely a good idea to keep your crypto assets in a cold storage, hardware wallet. If you are actively trading your crypto, then it might be helpful to keep your assets on an exchange wallet.
The main concept to takeaway from this, is that the ownership of private keys determines who actually is in control of the cryptocurrency. Also, that these large exchanges do have incentives to keep your crypto safe and likely can handle security better than us as individuals. As long as it’s trustworthy, I would feel confident in them holding on to my crypto.
Thanks for reading and let me know what other questions you have in the comments below.