How Do You Keep Your Bitcoin Safe?
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Over the past decade, cryptocurrencies have drastically grown in popularity. At one point it seemed like everyone wanted a piece of it.
For Bitcoin investors in particular, the last 5 years has been a rollercoaster ride. In 2021, Bitcoin’s prices saw a massive drop. This fluctuation continued through to 2023. The collapse of FTX in 2022 also made investors nervous.
The recent news of Bitcoin’s record breaking rally to hit US$100,000 per coin has again put the spotlight back on cryptocurrencies. With the value of Bitcoin and other cryptocurrencies hitting record-setting highs, the threat of hacks and thefts are even higher.
These recent developments have taught us that it might be a good idea to take your crypto off exchanges and put them into cold storage.
For those who are not active traders, it may be a good idea to find out how to safely store your cryptocurrencies. Here’s a quick roundup of the top ways to keep your cryptocurrencies safe.
Types of cryptocurrency storage
If you have joined the bandwagon to invest in cryptocurrencies, don’t forget that you need to store them safely. Remember, although they have monetary value, they cannot be stored in your a regular bank account!
The main types of crypto storage are:
- Custodial wallet (licensed crypto exchanges or third party custodian that stores your crypto private keys)
- Hot wallet (software on desktop, mobile or web-based wallet)
- Cold storage (or cold wallet that is not connected to the internet)
Custodial wallet (crypto exchange)
A crypto exchange is an online platform or app that lets buy, trade and transact cryptocurrencies. Most wallets provided by crypto exchanges may charge a transaction fee for sending or selling cryptocurrency.
A custodial wallet provided by a third party like a crypto exchange can safely store your private keys to a certain extend. However, custodial wallets have increasing been the target of many cyber attacks in recent years.
Hot wallet
This means storing your cryptocurrency using software that is accessible by an internet connection. Hot wallets work by generating a private key for owners to access their cryptocurrencies.
This method is easier to access especially for active crypto traders. However, the fact that it is accessible online makes this vulnerable and can be hacked.
Cold storage
The safest way is to put your crypto investment in cold storage. But first you need to understand the basics of cold storage and the risks involved as well.
This type of wallet is not connected to the internet. This means is is harder to be compromised. They are also referred to as offline wallets or hardware wallets.
What is cold storage wallet for crypto?
You may have come across this term in relation to crypto investment – cold storage. It is not referring to the freezer compartment for your food but the idea is similar. Putting your crypto into cold storage means taking it offline and storing it in a digital wallet. Since these digital wallets are not connected to the internet, it makes your crypto assets harder to steal.
This method is much safer than simply leaving your crypto in an exchange. If you leave it on the exchange, you will only be able to access your crypto assets if the exchange is able to distribute your funds to you. Should anything go wrong with the exchange, such as a hack or mismanaged funds, your money might be gone for good.
There are some downsides to storing crypto in cold storage. For one, doing so will make your assets far less liquid, thus making it harder to trade or cash out quickly. This is due to having to go through more protective steps to access your funds. However, the safety that cold storage offers might just be worth the extra effort.
Types of cold storage wallets
1. Hardware wallets
Arguably the most common type of cold storage. They are more or less an advanced version of the USB drive that allows you to store your private keys in an offline and portable manner. In order to access your crypto keys, you will have to plug your hardware wallet into a computer.
Your private crypto keys are essentially embedded into your hardware wallet. As such, when you go to send or approve a crypto transaction, instead of copying the key or even having to pull it up on the screen, you can just click a button through the wallet to authorise transactions. This reduces the chance for your keys to be compromised.
While hardware wallets are definitely one of the more secure ways to store your crypto assets, there are still downsides to it. For example, if you forget your wallet’s pin number, or if you lose the physical wallet itself, you will typically have a recovery phrase that you can use to recover your private key to access your funds from another wallet.
However, if you forget or lose that phrase, then you might be out of luck. The loss of the recovery phrase is one of the most common ways of losing cryptocurrencies. On top of this, it should be noted that hardware wallets are not exactly cheap either.
2. USB Drive
Are hardware wallets a little too pricey for your tastes? Then maybe you can try using a traditional USB flash drive to store your private crypto keys. This is a much cheaper and affordable option for cold storage, but this is also nowhere near as secure as having a dedicated hardware wallet. USB drives can’t enable transactions at the click of a button either, so there is an added risk factor there. Overall, they are pretty much only useful for storing your private key offline. Generally speaking, USBs should be used as a temporary solution and are not suited for long-term storage.
3. Paper wallets
If you want to get even more low-tech, putting your private key or a QR code on paper and storing it somewhere is definitely an option, albeit not a recommended one. Think about how many scraps of paper or receipts you have forgotten about or misplaced in your wallet throughout your lifetime. If you can imagine that, you can also imagine why this is not the greatest idea for storing your private keys. This should be an absolute last resort, and even then, a temporary solution at best.
Putting your private key or a QR code on paper and storing it somewhere is a very low-tech form of cold storage — and not a good one at that. Think about how many papers you’ve misplaced, damaged, or forgotten about in your life.
4. Sound wallets
Sound wallets seem to be something straight out of a spy film. They involve encrypting and recording your private keys in sound files on products such as CDs or vinyl disks. The code hidden in these audio files can then be deciphered using a spectroscope application or high-resolution spectroscope when needed. This is a very cool method of storage, but it can be prohibitively expensive depending on your chosen medium of storage.
Is cold storage really the best way?
In the end, cold storage is a method that removes your private keys from your wallet. As such it is currently the best method for storing your cryptocurrency private keys.
At least, it works by denying access to anyone who does not know how to retrieve it. It is certainly a much safer option compared to hot wallets or keeping your crypto on the exchange.
If you need some more tips on keeping your cryptocurrencies safe, here is an article on keeping your digital wallets safe.
