What is the Safest Way to Store Cryptocurrency?

You work hard for your money, so it’s imperative that it stays safe and out of the wrong hands. With regular Canadian dollars, this usually means choosing a trustworthy bank, using strong passwords for online banking, and checking your accounts regularly for fraud.

However, when you dabble in cryptocurrencies, you need to be extra careful about who you trust, as crypto’s digital nature makes it more vulnerable to hacking. Luckily, there are ways to keep your crypto secure. Let’s explore the safest way to store crypto and share some tips for protecting yourself when investing in digital assets.

Why does cryptocurrency need storage?

Before we begin, let’s start with a quick overview of cryptocurrency. Cryptocurrencies are digital tokens you can exchange through secure transactions on decentralized computer networks called blockchains. While these tokens live on the blockchain, crypto wallets make it easy to send and receive them between accounts.

To move tokens between crypto wallets, you use a unique account number for each type of cryptocurrency you own, known as a public key or wallet address. Each account also has a private key. When working with crypto, it’s imperative that you keep this info safe with a crypto wallet.

In fact, good security is essential because blockchain transactions are permanent and can’t be reversed. Since crypto is decentralized and mostly unregulated, there’s no third party like a bank or government to protect your tokens or guarantee your investment if something goes wrong.

How to hold cryptocurrency safely

Before we get into the details of how you can safely store crypto, it’s important that you understand that there’s no such thing as a completely foolproof way to prevent your crypto from being stolen.

This might sound scary, but it’s vital to recognize that there are people out there who want to steal whatever money, assets, and information they can get their hands on. The sooner you understand this, the better prepared you’ll be to keep your crypto and other assets as safe as possible from the threat of theft.

In fact, these sorts of hacking attempts are just as big of a problem with regular bank accounts as they are with cryptocurrency wallets. But the new, fairly unregulated, and decentralized nature of crypto poses unique risks that you don’t get with fiat currencies like the Canadian dollar.

If you are ready to jump into the world of cryptocurrency, you’ll need a cryptocurrency wallet to manage and protect your crypto assets. A cryptocurrency wallet is a software program that stores your public and private keys, lets you send and receive digital currencies, check your balance, and interact with different blockchains.

There are many cryptocurrency wallets, but the main difference is whether they are cold or hot. A hot wallet is connected to the internet, and you can access it anytime, while a cold wallet is not connected to the internet. This keeps your crypto offline.

With that in mind, the most secure method for storing crypto is usually in a cold (offline) hardware wallet that’s kept in a safe, private location.

What is a cold wallet?

If you are new to the world of crypto, the words “cold (offline) hardware wallet” might sound like a bunch of techy jargon, so let’s break down what this means.

Basically, anyone who owns crypto should have something called a cold crypto wallet. A cold wallet protects against unauthorized access and online attacks. It works by storing your private keys and public addresses (wallet address) safely.

Your private keys are a secret set of numbers identifying you as the owner of crypto assets stored on the blockchain. Meanwhile, you give your public addresses to other people so they can send you crypto. Think of this as a public-facing email address to which people can send money.

A crypto wallet provides a theoretically secure place to hold onto your private keys and public addresses. It does not actually store your crypto, as all crypto is stored on the blockchain.

Rather, any crypto on the blockchain associated with your private keys is yours and yours alone. Giving someone access to your private keys effectively gives them the power to take your crypto without your knowledge.

A hardware wallet is effectively a small device (usually shaped like a USB stick) that you keep in a safe, private location. Storing your private keys on hardware wallets makes it very difficult for anyone to gain access to them and your crypto because it’s not connected to the Internet.

What is a hot wallet?

While cold wallets are the best option for long-term cryptocurrency storage, there are other methods for storing crypto, such as a hot crypto wallet. Hot wallets, also known as software wallets, are digital storage solutions or mobile wallets that keep your cryptocurrency keys on devices such as smartphones or computers.

Hot wallets provide a good mix of security and convenience. They offer instant access to your cryptocurrency, making them great for daily transactions.

However, because they’re connected to the Internet, they are vulnerable to cyber threats like hacking and phishing. So, if you are using a software wallet, it’s essential to maintain strong security practices, such as avoiding websites that don’t have valid SSL certificates or using two-factor authentication.

What are paper wallets?

Another secure method for storing cryptocurrency is to use a paper wallet rather than a hardware wallet.

A paper wallet is another cold storage method, like a hard wallet. But instead of using a USB stick-like device, paper wallets store your private keys on pieces of paper.

These wallets were pretty popular in the very early days of the cryptocurrency movement, but they’re not as common anymore. They have a clear advantage over hardware wallets because they’re pieces of paper that can’t be hacked. However, they’re less popular nowadays because they’re more inconvenient and paper is easily damaged.

Therefore, for most crypto investors, paper crypto wallets just aren’t practical. You might want to consider them if you are storing very large quantities of crypto, but they might not be the best choice for the average investor.

What is crypto exchange?

Finally, another place you can store cryptocurrency is through a crypto exchange.

Crypto exchanges are online platforms where you can buy cryptocurrencies like Bitcoin and Ethereum using real money, trade different types of cryptocurrencies, and convert your crypto back into cash.

Many crypto investors store their crypto on the exchange where they purchased it, and many of these exchanges offer free hot wallets for storage. But in order to use it, you’ll need an account with the exchange.

Your account on a centralized exchange may be called a hot wallet, but the difference is that you don’t control the assets—the exchange does. This means you don’t have access to the private keys, so you have to trust the exchange to keep your assets safe instead. These types of wallets are known as hosted or custodial wallets.

While keeping your funds in an exchange’s custodial wallet is a simple and convenient way to use cryptocurrency, this means that the exchange will always have control over your funds. If the exchange is hacked, you risk your crypto being stolen.

Why is the safest way to store crypto in a hardware wallet?

Now that you’ve got a better understanding of the different ways to store cryptocurrency safely, let’s talk a bit about why hard wallets are often the best method for secure crypto storage.

The primary benefit of hardware wallets (also called cold wallets) is that they’re not connected to the Internet. Most hackers use the Internet’s power and interconnectivity to gain access to information and assets. So, keeping your private keys off the Internet is one of the best ways to keep them safe.

On the other hand, online or hot wallets store your private key on the Internet. Although most companies that provide online hot wallet services have very good security features, keeping your private keys online makes it easier for hackers to gain access to your information.

Another increasingly popular secure storage solution that we should mention is multi-signature wallets. These wallets offer a more advanced way to protect your private keys. These wallets require authorization from two or more people to approve an outgoing transaction. Often referred to as “multi-sig,” they are particularly useful when cryptocurrency or other digital assets are owned by multiple individuals or managed by a company.

Hacking issues for hardware wallets

Going back to hardware wallets, we want to mention that there have been a number of hacking issues in the past that explicitly targeted hardware wallets. For example, in 2021, some cyber criminals sent fake hardware wallets to crypto investors. These fake wallets were tampered with so that hackers could gain quick and easy access to an unsuspecting investor’s crypto.

Thankfully, stories like this aren’t common. However, they underline the fact that there is no infallible way to store cryptocurrencies. That’s why the ideal approach is to use multiple cold storage options for long-term holdings plus one or more hot wallets for daily trading and crypto transactions.

There are steps you can take to help prevent hacking, such as using a hardware wallet and checking for any evidence of tampering before you trust it with your crypto. However, vigilance and good safety practices are key to secure crypto storage.

What are the possible risks of storing cryptocurrency?

While you have to store your cryptocurrency in order to manage it, storage is not without risks. Things like online hacking, software failure, and phishing scams are real problems for people with crypto assets.

Online hacking

The biggest risk to cryptocurrency storage is online hacking. Digital wallets, especially those connected to the internet, are prone to cyberattacks. Hackers are always finding new ways to bypass security measures to steal valuable crypto assets. Plus, unlike government-regulated currencies, there’s no legal protection on cryptocurrency if you are hacked. Once you’ve lost your crypto to a hacker, there’s little to no chance you’ll get it back. This danger makes it essential to implement strong security practices, including using cold storage options for large holdings and only keeping the amount you need for transactions on an exchange.

Software failure

Software wallets are at risk of software failure. Bugs or glitches in the wallet application can lock users out of their accounts or even cause them to lose funds. That’s why it’s important that you regularly update the software and do your research to make sure you are choosing reputable wallet providers.

Phishing scams

There are many forms of phishing scams related to cryptocurrency. Just like how someone may try to steal money from your bank account or make fraudulent charges on your credit card, crypto scammers will do whatever it takes to steal your crypto. These phishing scams are made to try to steal your credentials to access your wallets. They often use fake websites or emails that look like legitimate services to trick you into giving up sensitive information. That’s why it’s essential for you to stay up to date on the current crypto phishing scams and to always research whether the wallet, exchange, or app you are thinking about using is trustworthy.

Physical damage or lost access

While cold storage solutions like hardware and paper wallets are the safest way to protect your crypto, physical storage solutions carry the risk of damage or loss. Fire and water damage can destroy physical devices or paper wallets. You also run the risk of losing access to your crypto if you misplace your USB or physical device. But the risk isn’t just for cold storage. You also risk losing access to your wallet if you forget your login credentials or if the mobile phone linked to your account is lost or stolen. This is why it’s a really good idea to keep your crypto in multiple secure storage solutions, just in case you lose access to one.

Crypto storage safety tips

Keeping your crypto secure is an ongoing process. Having a quality hardware wallet is just one part of this larger process. In addition to having and using a hardware wallet, there are plenty of other steps you can take to store your crypto securely. With that in mind, here are 5 crypto storage safety tips to get you started.

1. Be internet smart

First thing first: if you are going to invest in crypto, you need to know how to keep yourself safe on the internet. Since crypto is a digital asset, anything you do on the internet could potentially compromise your device’s security, which could put your money at risk.

General internet safety precautions will go a long way toward keeping your assets secure. These include:

• Avoiding websites that don’t have valid SSL certificates (look for the HTTPS in your browser’s URL bar)

• Learning how to spot phishing websites

• Double-checking crypto addresses

• Ensuring that your Wi-Fi connection is secure (consider a secure VPN if necessary)

• Using two-factor authentication when logging in to websites (especially with crypto exchanges)

• Having up-to-date anti-virus software on your devices

• Treating all unsolicited and potentially suspicious text messages, emails, and phone calls with a healthy air of caution

Following these general guidelines for internet safety can help prevent your computer from getting infected with malware or anything else that could compromise the security of your crypto. Hackers are getting smarter, but you have the power to keep your devices secure.

2. Use a reputable crypto exchange

Most people who buy cryptocurrencies do so using some sort of crypto exchange. These exchanges act like a kind of marketplace where you can buy and sell dozens of digital assets, like Bitcoin, Ethereum, and Dogecoin.

The world’s largest exchanges are what we call “centralized exchanges,” which means that they’re run by a single company. These companies provide us with a straightforward way to connect with other crypto investors and to trade assets. But these companies also pose a potential security risk if they’re not reputable organizations.

Therefore, whenever you buy crypto, be sure to do so with a reputable exchange. Crypto is minimally regulated in many countries, so oversight of exchanges can be fairly limited.

Because of this, you need to do your research to ensure that you are trusting a reputable exchange with a solid track record of preventing cyberattacks before you start using that platform. A fancy new exchange might advertise low fees or cool features, but do you really trust them with your money?

3. Avoid keeping coins on an exchange

Most crypto exchanges give you the option of storing your crypto on the exchange’s hosted wallet service after you make a purchase. Doing so is simple and convenient, but it’s often a major security risk.

When you store your coins on an exchange, you give a company full control over your private keys. While most major exchanges are quite reputable, you don’t necessarily want to give some company all that power over your assets. Plus, crypto exchanges are prime hacking targets simply because they have control over so many private keys.

Moral of the story? It’s usually best to avoid keeping coins on an exchange. As soon as you buy crypto, consider transferring your assets to a personal wallet where you have full control over your private keys.

4. Store your wallet in a safe place

Using a hardware wallet for your crypto is often a great idea. But a hardware wallet won’t do you any good if someone else can get access to it.

The fact that hardware wallets are physical items means that they’re susceptible to theft, just like any other valuable electronic device. At the same time, even the simple act of misplacing your hardware wallet could mean that you lose access to all of your hard-earned crypto.

That’s why it’s so important that you find a secure place to store your hardware wallet. This generally means leaving your wallet in a hidden place at home or, if you are storing very large amounts of crypto, potentially in a safe deposit box. Doing so can prevent theft, loss, or damage to your wallet.

Of course, there are methods of recovering your private keys, even if you no longer have access to your hardware wallet. This normally involves using the recovery phrase (seed phrase) that you wrote down when you activated your wallet.

But it’s best if you can avoid losing your wallet in the first place so that you don’t have to deal with the stress of trying to recover lost crypto.

5. Use address whitelisting

Address whitelisting is an underrated yet very effective technique for keeping your crypto secure.

With address whitelisting, you can limit crypto withdrawals from a wallet or exchange to a set of pre-approved public addresses. These public addresses can be for wallets that belong to you, your friends, your family, or whoever else you regularly send crypto to.

Establishing address whitelisting can prevent someone from withdrawing your funds to an unapproved address. This makes it very difficult for a hacker who’s gained access to your private keys or log-in information to steal your crypto.

A savvy hacker could try to add their own public address to your address whitelist by logging into your exchange account, but doing so usually requires a 3 to 7-day hold period. During that hold period, you’d likely receive some sort of alert telling you that someone tried to add a new address to your account. If that happens, you can stop the crypto transfer before it’s too late.

How do I keep my cryptocurrency safe?

Keeping your crypto safe is of the utmost importance when you invest in digital assets. The best way to store crypto is usually in an offline hardware wallet. However, using a hardware wallet should be just one part of your overall security strategy. It’s best to use multiple cold storage options as well as hot wallets for daily trading and transactions. Plus, always practice safe internet browsing techniques and only use reputable exchanges to help protect your crypto from cyber criminals.