Consider this – since its introduction, it is estimated that 3.7 million Bitcoins have been lost permanently. Given today’s current Bitcoin value of just under $22,000, this equates to a pretty incomparable loss.
At the same time, it also underpins the importance of storing your cryptocurrency as safely and securely as possible.
As with conventional cash, any crypto you lose (whether through any fault of your own or otherwise) is gone for good. Retrieving lost crypto treads a fine line between difficult and impossible, making it vital to keep a close eye on your assets at all times.
The good news is that these days, there are several different options available for storing cryptocurrency. Specifically, there are four main types of crypto wallets – Hot, Cold, Custodial, and Physical.
Each with its own advantages and disadvantages, worth considering before deciding which way to store coins.
Custodial Wallets for Cryptocurrency Storage
Custodial cryptocurrency wallets are those where a third party – like a wallet provider or exchange – holds and manages the user’s cryptocurrency keys on their behalf. In terms of benefits, custodial wallets are comparatively user-friendly, requiring little to no input or effort on behalf of the user. They also come with a high level of security, with various safeguards in place (such as two-factor authentication and insurance), to protect the user’s assets.
On the downside, the users do not have full control over their private keys, which could lead to problems in the event that the custodian goes bankrupt or is in any way compromised. Any operational issue or security breach that affects the custodian could wipe out some or all of the user’s funds, and the private information submitted by the user when opening their account could also be compromised.
Cold Wallets for Cryptocurrency Storage
Cold cryptocurrency wallets are ‘offline’ storage solutions, providing a high level of security for crypto coins. Paper wallets and hardware wallets fall into this particular category, which due to the absence of an Internet connection eliminates the risk of malware attacks, hacking and general security breaches. Cold wallets also give the user total control over their private keys for added security, with the added bonus of simplified transportation for those looking to access their crypto on the move.
Drawbacks with cold wallets include their potential costs, along with the risk of loss in the event that the wallet is damaged or lost. It is also less convenient to use and transfer funds using a cold wallet than with a comparable hot wallet or custodial wallet.
Hot Wallets for Cryptocurrency Storage
Hot cryptocurrency wallets are connected to the Internet, making it quick and convenient for the user to access and use their funds from any location. Many leading hot wallet providers offer their services free of charge, making them a popular choice among newcomers to crypto with limited funds in their wallets. You only need an Internet connection to access a hot wallet via almost any device – standard computers and smartphones alike.
The biggest downside of a hot wallet is its potential susceptibility to malware attacks and hacking, which could lead to loss of funds or breaches of privacy. In addition, a hot wallet will often be offered as a custodial wallet, which means that the user does not have total control over their private keys. It may also be necessary to share sense to private information with a hot wallet provider, in order to open an account.
Physical Wallets for Cryptocurrency Storage
A physical cryptocurrency wallet (like a USB drive) can bring the highest possible level of security, as there is no risk of malware attacks or hacking. The user has total control of their funds and their private keys, adding up to greater security and independence than some other types of wallets. Physical wallets are also easy to transport and access, so they can be taken from place to place and accessed with ease using any compatible device.
In terms of risks, the main drawback of a physical wallet is the potential for the storage device to be lost, damaged, or stolen. In addition, some types of physical wallets are not compatible with all crypto coins, limiting their versatility for investors looking to build a diverse portfolio of crypto assets.