06 July 2022
Secure your cryptocurrency: Storage options and best practices
Every cryptocurrency owner needs a place to store his assets, and the storage method of choice needs to be as secure as possible. While there are many options available when it comes to storage, sooner or later, those who want to hold cryptocurrencies for the long-term will eventually need to start thinking about who exactly is the one holding all the keys to their crypto.
In fact, while you may use an Exness Bitcoin wallet for making cryptocurrency deposits and withdrawals to and from your Exness account; these wallets should not be used for long-term accumulation of your crypto wealth.
So, first, let’s clarify what these so-called wallets are. In short, a crypto or digital wallet can be a web or mobile/desktop application, hardware device, or even a piece of paper, which is able to store your private key or seed phrase. Private keys may come in alphanumeric format or, more commonly, in the form of a seed phrase, which is a list of common English words in sequential order. If somebody has access to your private key, it means they have access to the funds in your wallet, and this is why you should be the only one with access to your private key and why you should never share it with anyone else.
Below we will outline the different cryptocurrency storage options you have at your disposal along with their risks, pros, and cons.
In terms of access to a wallet’s private key, there are 2 ways to store cryptocurrency - custodial and non-custodial wallets.
Custodial wallets are wallets provided and controlled by a third party (custodian). Typically, the third party is a cryptocurrency exchange, which controls your private key.
This is the simplest and most convenient option as a custodian will effectively be handling your wallet, and you don’t need to worry about losing your private key. As long as you can access your exchange account, you can access your crypto. However, this convenience comes with the lowest security level:
As a custodian has full control over your crypto assets, they may freeze your holdings if there’s fraudulent activity on the exchange or for any other reason
Unreliable custodians are prone to scams
Custodians can be hacked - as we’ve seen in the past
Your custodian credentials can be leaked or stolen
Multi-factor authentication (MFA) can be bypassed using SIM swapping, or TOTP key leak
As such, custodial wallets should not be used for the long-term storage of your crypto.
Non-custodial wallets are totally owned and controlled by you as you are the only one with access to the private key or seed phrase. Generally, there are two types of non-custodial wallets: hot wallets and cold wallets.
Hot wallets, such as desktop and mobile wallets, generate and store your private keys on internet-connected devices. Internet access makes transactions quick and easy, however, these wallets are meant to be used for small amounts of cryptocurrency. This is because it is much easier for hackers to discover and exploit security loopholes associated with hot wallets such as malware and viruses.
Hot storage pros and cons
➕ Easy and quick transactions - balanced approach for daily use
➖ Lower security level than cold wallets
➖ Risk of losing access to your crypto in case of losing the seed phrase
Mobile wallets have become increasingly popular due to the convenience of smartphones. On the other hand, it has also led to scams, such as the distribution of malicious Android and iOS apps through websites impersonating legitimate services. These malicious apps are able to steal victims’ seed phrases by mimicking a Trust Wallet, Coinbase Wallet, MetaMask and other popular mobile wallets. Such attacks have become incredibly sophisticated - attackers modify the official apps in a way that it’s hard to detect malicious activity since they are identical in every way to the originals. These trojanized apps are distributed through various channels, including fake wallet websites and Telegram groups. Two of the most recent scams are SeaFlower and CryptoRom, targeting mobile wallets users.
Other malware can hijack your device’s clipboard history and replace an address you copied with the thieves’ wallet address. Thus, when copy-pasting addresses, a user should double-check to make sure they match the address intended to be copied.
Cold wallets, such as hardware wallets or even paper wallets, store your private keys offline. Since they aren’t connected to the Internet, they offer a greater level of security than hot wallets. There is a trade-off in usability, however; in order to make transfers, these wallets need to be used in combination with an internet-connected device.
Cold storage pros and cons
➕ Provides maximum security
➕ Hardware wallets allow you to double-check the recipient address when making transfers
➖ Device cost and inconvenience (compared to software wallets) are barriers to entry
➖ Risk of losing wallet access in case of losing the seed phrase or private key
➖ Each hardware wallet has certain types of cryptocurrency it can store
However, like any other wallet, cold wallets are also prone to human error. For example, scammers can send fake hardware wallets, which contain hardware designed to steal crypto. To initialize the device, a user is asked for their 24-word recovery phrase, which can then be used by attackers to generate the wallet’s private keys.
Also, not all hardware wallet vendors have their source code freely accessible to the public. Thus, it may be worth doing additional research to make sure the hardware and software are safe.
Top security measures and best practices to secure your crypto
Use cold wallets for accumulating cryptocurrency
Use hot or custodial wallets for smaller amounts of crypto that you want available for trading
Protect your private keys or seed phrases against theft. Never share them with anyone. In order to reduce the risk of their loss, make copies and store them in different places, or store your crypto in multiple hardware wallets.
Use strong passwords. Password managers are the most secure option
One of the most effective scams in the cryptocurrency industry is phishing attacks. Avoid clicking on unknown or suspicious ads and links.
Regularly check your devices with anti-malware software
Deal with reliable and reputable entities only
Double-check any and all investment options offered by third parties. Legitimate crypto exchanges and brokers will often remind you that cryptocurrency comes with risks before you decide to engage
When copy-pasting an address for crypto transfers, make sure it matches the one intended
If possible, use a single device for your transactions
Always keep your software up to date
Use a multi-signature wallet, which requires approvals from two or more people to execute transactions
Split a seed phrase into parts and store each part in a different location
Remember that cryptocurrencies - for better or for worse - are decentralized assets and the responsibility of keeping your crypto secure rests with you alone. Make sure you’re aware of all the basic security measures, so you can choose the security level you wish to apply based on the amount of crypto you hold and your personal risk tolerance.