Cryptocurrency has been a popular topic of discussion recently. With impressive technology, silly tweets from celebrities, and massive potential gains and losses, it's no wonder crypto has taken over the internet.
However, the increased popularity has not removed all the worry and skepticism revolving around this investment class.
One of the main concerns with cryptocurrency is security. Investors worry that their funds could be lost due to hacking or scamming tactics.
In this article, we will take a deep dive into safe storage of digital coins. If you are wondering how to store crypto safely, then this is the article for you. We will also provide a review of topics such as crypto security, public and private keys, cryptography, and more.
Cryptocurrency, or crypto, is a type of currency. Like the US dollar or Chinese Yuan, crypto is a currency that can be used to buy goods and services. However, there is one key difference: crypto is not backed or regulated by a central bank. Cryptocurrency is made possible through blockchain technology, which utilizes cryptography to secure the network.
Cryptocurrency is managed across many computers in an online ledger. This appeals to many as it makes it nearly impossible to counterfeit.
Some think of crypto like an arcade token. You can exchange other money for coins or tokens and use them for a variety of games. Today, companies are starting to accept various forms of cryptocurrency as payment for their goods and services.
The value of a crypto moves up and down due to spectator beliefs and scarcity of the currency. Unlike a company that produces a product or offers a service, there is no inherent value of a cryptocurrency, which adheres to the Greater Fool Theory.
The Greater Fool Theory is an economic principle that states money can be made when buying overpriced assets. This is possible as there is typically someone else who would be willing to pay more for that same asset.
There's a common misconception in the world of cryptocurrency regarding security. Many believe that the technology behind cryptocurrency is not safe, but this isn't true. However, it is easy to understand why people have adopted this thought.
There are 2 main reasons why people might worry about an investment in crypto. First, investing in digital tokens is a high risk investment that experiences major volatility. It is not uncommon for a cryptocurrency to spike 20+% in either direction in a single day. In fact, at the time of this writing, the popular crypto Dogecoin, fell over 40% in the early morning and was completely recovered within an hour.
This rapid rise and fall certainly impacts the way investors view crypto. This asset class may not be for investors that cannot remove emotion from the equation. With daily swings, investors may sell their investments and experience a massive loss. Because of this high volatility, many people worry about the longevity of crypto.
The second reason people worry about cryptocurrency investing isn't the security of the technology that makes blockchain possible, but rather the security of exchanges themselves.
In 2019, twelve cryptocurrency platforms were hacked resulting in the loss of over $292 million in funds and over 500K stolen user logins. Needless to say, the platform you choose to use is highly important.
From individual phishing to large scale hacking, user's funds are at risk of loss due to the storage of keys.
Public and private keys are unique codes that are generated when an investor makes his/her first crypto trade. These keys are used to prove ownership of cryptocurrency and can be thought of like a user login.
To better understand public and private keys, let's take a step back and understand cryptography. The word means "secret writing." The prefix 'crypt' means hidden, secret, or vault, and the suffix 'graphy' means writing. With this in mind, we begin to understand that blockchain uses cryptography as a security measure. The public and private keys are unique alphanumeric codes that both prove ownership and secure holdings within the economy of cryptocurrency.
The public key is used to send cryptocurrency into an account. It can be thought of as an address. The name 'public' is literal in that everyone on the network can see this key. When two users agree to a transaction, one user will need to offer their public key in order for the other to send cryptocurrency. Likewise, the receiver of the tokens can see the sender's public key to verify where the coins came from. This is similar to an account and routing number used to send money to your bank account.
The private key is not to be shared. This is used to spend or withdraw assets from an account. The public key is actually generated from the private key. If the public key is lost, a user can actually retrieve it using the private key, but the reverse is not true. Losing a private key results in the loss of the funds held in the account.
Similarly, if someone else were to obtain your private key, they would have access to your funds.
Storing cryptocurrency is done through the use of a wallet. Just like fiat currency that is held in a bank account, digital coins need to be held somewhere. The wallet that a crypto is held in stores the public and private keys of the user.
There are a few different types of wallets that can be used. While they all allow a user to store their tokens, they definitely feature different levels of security. Let's review the various types and pros and cons of each.
A digital wallet is one that is connected to the internet. It is often referred to as a type of 'hot storage.' Many exchanges such as Coinbase or Crypto.com offer a digital wallet for free to their users. You can also create an account with a digital wallet not attached to a cryptocurrency exchange.
Using an exchange like Coinbase, an account holder can purchase a cryptocurrency and either hold it in the app or transfer it to their own wallet using the public key or address. When they transfer the coins, they can move the assets to a digital wallet or a cold wallet.
The main advantage with a digital wallet is the convenience they offer. With a cold wallet, in order to trade, you would have to move your cryptocurrency back into an exchange, then execute a trade, and then transfer it back to the cold wallet. With a digital wallet, the funds are already connected to the internet offering greater trading speed.
The main disadvantage deals with security. Unlike other accounts with FDIC and/or SPIC insurance, cryptocurrency is not insured. This doesn't change based on the wallet you use. Whether its digital or cold, the crypto is not insured. However, with a digital wallet, the account is held online, and therefore your keys and held online. If another person were to acquire your login password or hack the exchange, then your funds would be at risk.
In some instances, like with Coinbase, your funds are actually held in a cold wallet that Coinbase offers private insurance for. It is important to note that when funds are held in a cryptocurrency exchange, the public and private keys are managed by the platform, not by you.
A digital wallet can be one that you personally opened and you own the keys or can be one where a cryptocurrency platform offers to you and they own the keys.
A cold wallet is a storage device that is not connected to the internet. It is often likened unto a USB or thumb drive.
A cold wallet uses an offline device or smartcard to generate private keys offline. In other words, the private key is never online, and therefore protected against hacking.
The main advantage with a cold wallet is the added security. If a cold wallet is lost or damaged, there are typically still ways to recover your assets. For example, many cold wallets, like the Ledger Nano, offer users something called a word seed, which is a recovery phrase used to recover funds. Though if someone stole your cold wallet, they could plug it in and access your funds.
A paper wallet is a type of cold storage where the user prints the public and private keys on a piece of paper.
It is important that this piece of paper is stored in a safe place like a safe. If this piece of paper is lost or damaged, the user will not be able to retrieve their assets.
Cryptocurrency is becoming a highly popular investment. With all the hype and increased demand for digital currencies, there has been a proliferation of new crypto exchanges. In fact, other investing platforms like Robinhood or Webull have also added capabilities to allow account holders access to cryptocurrency trading.
Like any investment, cryptocurrency certainly carries risk. That risk should not be confused with security. Cryptocurrency as an investment is safe as it relates to the technology behind it. However, because crypto is not regulated by a central authority and therefore not insured, investors do have security concerns. These concerns relate to the safety of an exchange and the secure storage of funds.
Storing crypto is done through the use of a wallet. This wallet can either be 'hot' or 'cold.' A hot wallet is one that is connected to the internet while a cold wallet is offline. They each have their own unique pros and cons and are often used together.
It is common for an investor to use a cold wallet like a savings account and a hot wallet like a checking account. However you decide to store your cryptocurrency, be aware of the importance of using strong passwords and keeping your information private.