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Cryptocurrency is more popular than ever, and secure storage solutions for digital assets are just as important. With cyber threats and exchange hacks, choosing the right storage method is important for protecting your crypto wealth.
Let’s take a closer look at the costs, benefits, and risks of different types of wallets and find out which is the safest option for protecting your gains.
What are your main crypto storage options?
There are three main types of crypto wallets: Hot wallets, cold wallets, and custodial wallets. Each has its own level of convenience, security, and risk, so it’s worth some thought before making a decision.
Hot wallets
Hot wallets are internet-connected storage options, perfect for everyday transactions and crypto trading. They’re typically used on mobile wallets, desktop apps, or through online platforms like Trust Wallet and MetaMask, letting users manage their assets on the go.
They’re super convenient as they let users quickly start blockchain transactions as well as transfer between wallets, or trade on exchanges. In other words, they’re a go-to solution for those who often need access to their digital assets.
However, because they are always online, they also come with a number of major security concerns. There is a much higher risk of having your hot wallet hacked compared to offline storage methods.. So, while they’re convenient and user-friendly, hot wallets are less secure options for storing large amounts of cryptocurrency holdings, especially long-term investments.
Cold wallets
Cold wallets are offline and specially designed for ‘cold storage’, making them a highly secure option for anyone looking to store their crypto assets over the long term. These wallets aren’t connected to the internet, which reduces the risk of online threats like hacking and malware attacks.
Popular cold storage methods include hardware wallets, like Ledger and Trezor, or paper wallets, where private keys are printed on paper and stored securely. Although they come with high upfront costs, their higher level of security makes them the most reliable method of protecting large amounts of cryptocurrency and long-term holdings.
Custodial wallets
Custodial wallets are managed by a third party – typically a cryptocurrency exchange – where the platform holds and secures your crypto assets on your behalf. They are very convenient for beginners and users who don’t want to manage their own private keys and let users focus more on trading without the technical responsibility of securing funds.
The main problem is that the exchange has control over your wallet address and assets. This makes them slightly less safe than cold wallets, as security breaches and hacks on the platform can risk your funds.
So, what is the safest way to store cryptocurrency?
The safest method for storing cryptocurrency is to use a cold wallet. These wallets, especially hardware devices, are not connected to the internet, which dramatically reduces the risk of online attacks.
With cold wallets, you maintain full control of your private keys and seed phrases, ensuring that your digital assets remain secure.
While cold wallets are highly secure, it’s still important to protect your recovery phase and store the wallet in a safe place to avoid physical loss or theft. For additional protection, you can also use multi-signature wallets, which require multiple private keys to access your funds, further increasing security.
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Moving cryptocurrency to a wallet
If you’re serious about safeguarding your crypto holdings, moving them from an exchange to a crypto wallet is a must. Crypto kept on exchanges remains vulnerable to security breaches and hacks, with several well-known exchanges having lost millions of dollars worth of digital currency in past attacks.
By transferring your funds to a non-custodial wallet, particularly a cold wallet, you maintain complete control and drastically reduce the risk of being hacked.
Can cold wallets be hacked?
Although cold wallets are much more secure than hot wallets, they are not entirely immune to risks. Physical theft or misplacing your hardware wallet can result in the loss of access to your crypto holdings. To reduce this risk, make sure you store your cold wallet and recovery phrase in separate, secure locations.
Cold wallets that use multi-signature wallets provide extra security, as they require multiple approvals (private keys) before any crypto transactions can be completed.
Combining these wallets with strong passwords and physical security measures will significantly reduce the chance of losing your digital assets.
Keep cool with expert advice from the Crypto Tax Degens community
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