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Cryptocurrency Security: How to Safely Store Your Coins and Tokens

Cryptocurrency Security: How to Safely Store Your Coins and Tokens

One of the things that makes cryptocurrency so revolutionary is the idea of decentralization. For the first time in history, one person can send digital currency to another person, without the need for a bank or any other third-party. Users control their own funds at all times, and each transaction is immutably recorded on a blockchain.

While "cutting out the middleman" in this respect offers myriad powerful benefits (including the potential for faster and cheaper transactions), it also comes with a challenge: when you act as your own bank, you need to ensure that you're always operating as safely and securely as possible. After all, if your coins or tokens are lost because of a user error or a hack, you won't have Visa or American Express around to make you whole.

With that in mind, let's take a closer look at the best methods for keeping your cryptocurrency safe and secure.

The Essentials of Cryptocurrency Security

Unlike other asset classes, cryptocurrency is both a medium of exchange and (to varying degrees depending on the asset) decentralized. This means the available methods for storing digital currencies are more diverse and more complicated than usually seen with something like stocks or bonds.

Additionally, the technology that underpins digital assets varies considerably. Along with the possibility of stealing coins and tokens from individual holders, hackers may also attack an asset's underlying protocol by exploiting bugs or vulnerabilities. This means that it's important to invest in projects with sound technology and a demonstrated record of security and stability.

Once a purchase decision is made, storage becomes the most important element of security. For most crypto owners, there are two primary ways to store digital assets: inside a wallet, or within an exchange account.

While that may sound simple, the truth is that cryptocurrency wallets differ greatly in terms of functionality and the protection they offer, while exchanges also offer varying storage options and features.

Understanding how these differences work -- and how each approach may be best suited for the needs and preferences of each trader-- is the first step toward choosing a storage option that works for you.

Let's take a moment to review the specifics of each option.

Popular Cryptocurrency Storage Options

Hardware wallets

A hardware wallet is a physical device that allows you to store your digital assets offline (a process often referred to as "cold storage"). Because hardware wallets are offline, they offer the highest level of security (most cryptocurrency exchanges keep a portion of their assets in cold storage to ensure maximum security).

For retail investors, this process entails purchasing a hardware wallet -- such as the popular Ledger Nano S or Trezor -- and temporarily plugging that device into a computer. Once this is done, coins and tokens can be transferred into the hardware wallet for permanent storage. Your private keys (which control access to your digital assets) are on your hardware wallet, meaning no one else has access to them.

Because these keys are no longer online, hardware wallets offer the safest possible storage solution. Yet there are considerations of which to be cognizant. First, it's critically important that you don't lose the backup seed phrase given to you by your hardware wallet. This phrase allows you to access your funds should you lose your hardware wallet. As long as you have the 24 word seed phrase, you simply order a new wallet, input the phrase and your assets are once again accessible.

Safeguarding this backup phrase is an imperative; without it, you run the risk of having your coins and tokens become permanently inaccessible thanks to the powerful encryption used by hardware wallets.

You should also be aware that not every coin or token is supported by a hardware wallet. If you own lower-profile assets with a smaller market cap, you may need to find a different method to secure them.

Keeping assets in a hardware wallet also makes the process of trading more difficult. If you're a long-term holder, cold storage is the safest bet. If you like to trade with some frequency, however, the process of transferring assets back and forth may be too cumbersome or costly depending on deposit, withdrawal or transaction fees for trading.

It's also important to purchase your hardware wallet from a reputable vendor. Failing to do so may lead to the purchase of a hardware wallet that has already had its seed phrase compromised -- giving thieves the power to assume control of your digital assets.

Overall, hardware wallets offer the strongest level of security of any cryptocurrency storage option. If you're seeking to hold digital assets long-term, this is the option most aligned with your needs.

Software Wallets

While software wallets don't offer the same degree of security as cold storage, many of them do offer an attractive blend of security and convenient flexibility. These wallets, which are encrypted and downloaded onto your phone or computer, allow cryptocurrency to be easily transferred between wallets and exchanges.

The process is fairly straightforward: after downloading the software, you're typically given a seed phrase to copy, along with public and private keys. After setting a password, you can fund your wallet by sending digital coins and tokens to your public key, and storing them within the software wallet for safe keeping.

Unlike hardware wallets, there are hundreds of software wallets available. Many high-profile coins and tokens boast multiple software wallets, many of which are coded and maintained by volunteers or community members, rather than the core development team (Stellar, for example, has more than a dozen wallets).

Because software wallets are so numerous, it's important to do your due diligence and research each wallet before downloading. Remember, while many software wallets offer strong cryptographic protection, they aren't offline -- so they are vulnerable to bad actors. If you use them, it's vitally important to maintain good security hygiene practices: don't copy passwords or seed phrases into your devices, make sure the websites you visit are legitimate (always inspect the address bar) and don't share sensitive information online.

Overall, software wallets are a reasonable choice for crypto traders seeking a combination of good security and easy accessibility.

Paper wallets

In terms of storage options, it doesn't get much simpler than a paper wallet. In this case, you simply create new, randomized public and private keys and copy them down on paper or on an offline device. You can then send all your assets to the address inside your paper wallet.

There are a variety of online paper wallet generators you can use for Bitcoin and other digital assets. Because the keys are generated within your browser, you don't generally have to worry about someone duplicating it. You should, however, never take a photo of your keys.

While this offers strong security, there are some considerations. First, copying and inputting a lengthy string of numbers is nobody's idea of fun. There is also the question of storage; paper is vulnerable to fire and other hazards, and it may easily be thrown away by someone who doesn't recognize its significance. Once that happens, your digital assets are likely irretrievable forever -- or at least until the development of powerful, cryptography-cracking quantum computers decades from now.

Paper wallets rank at the top in terms of overall security. For those who like to transact or trade crypto, however, they may not be the most well-suited choice. Additionally, for those who hold many different coins and tokens, managing a large number of paper wallets may prove to be quite time-consuming.

The Universal Wallet

One thing you've likely noticed after reading our descriptions of wallet options: there doesn't seem to be a comprehensive wallet solution that offers full support and security for all coins and tokens. And that's accurate -- a so-called "universal crypto wallet" doesn't yet exist.

Part of the reason for this is technical; because cryptocurrencies use different blockchain technologies (and some don't use conventional blockchain at all), it's a complex challenge to integrate support for these various technologies into a single wallet. There are, however, projects that are attempting to create a universal wallet solution.

Someday, in fact, it may be possible to store all your cryptocurrencies in a wallet and purchase digital assets directly from that wallet as well. That brings us to our next storage option: cryptocurrency exchange accounts.

Exchange Storage

While keeping digital assets online in an exchange account isn't the most secure form of storage, it is the most convenient for those who trade. Because trading opportunities in the crypto market develop with such great rapidity, it's often necessary to have the assets immediately available. This is especially true given the vast disparity in transaction time among cryptos; some are nearly instant, and others can take 20 minutes -- an eternity for an eager trader.

Exchanges typically store their assets in hot and cold wallets, meaning some are online and some are offline. While most large exchanges have vigorous security protocols, any asset kept online does have greater risk attached -- though using an exchange can reduce the odds of user error occurring.

It should be noted that some exchanges offer dedicated cold storage options along with conventional trading accounts. For those who opt to keep assets on an exchange, it's important to follow best security practices. This means using a strong password and pairing it with two-factor authentication. Some exchanges also limit the amount of assets that can be withdrawn over a specific time period, and have sophisticated technological tools in place to defend against malicious activity.

For those who trade with great frequency -- or those who are simply too new to safely set up and use a wallet -- an exchange account paired with smart security practices may be a good fit.

Safe and Secure Storage Takeaways

To help ensure that your digital assets remain as secure as possible, consider the following:

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