Welcome to the second guide in a series of four that have been written and produced in partnership with Virtual Tech Vision. These guides will lay out the things you should consider as you enter the world of cryptocurrency investing – including how to buy and store your crypto and, importantly, how to safely take action today.
This guide will focus on storing cryptocurrency, comparing the pros and cons of digital and hardware storage solutions. If you missed the first part of this series, check it out below.
How do I hold cryptocurrency?
Owning cryptocurrency is unlike other assets. It’s natively digital – so you can’t actually touch it. And while traditional investments are usually kept in a bank or brokerage account, crypto investments are different: to store them, you need a “wallet”.
How does owning crypto actually work?
In owning cryptocurrency, you own an address where coins can be stored on the blockchain – and which have public and private keys.
The public key is an incoming-only address that can be freely shared so others know where to send coins or tokens. Think of it as your email address, but anonymous. Giving it to someone doesn’t let them send emails from it, only to it.
Think of the private key as the password to your email address. You need it to access your crypto – i.e. when sending cryptocurrency out of an address – in order to authenticate the transaction.
Actual cryptocurrency tokens just represent a balance on the blockchain. What you really own is a private key that allows you to make transactions from a given “address”. In other words, cryptocurrencies are only yours if you hold the private key that allows you to access them – and it’s those keys that’re stored in your wallet, or wherever else.
If your keys fall into someone else’s hands, you have a problem. As you’ll remember from the first guide, two people with a private key to the same wallet have an equal claim to those funds. And as cryptos are decentralized, there’s no authority to resolve disputes or enforce ownership.
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What is a digital wallet and how does it work?
The easiest and most straightforward way to hold crypto is via a cryptocurrency exchange. Although this may be the path of least resistance, it’s also the least secure: it leaves you vulnerable to hacking. And since you don’t have a private key to access your crypto, you don’t technically “own” it.
Enter digital wallets. You can open one with an exchange, or by downloading a wallet via a desktop or mobile app. Digital wallets let you hold on to those private keys yourself instead of relying on a third party – and allow you to store, send, and receive your cryptocurrency. Each provider will have slightly different processes – but generally speaking, you’ll be responsible for keeping that information safe somewhere on your computer or smartphone.
Advantages of digital wallets include:
- Fast transactions
- Ease of use on the go
- Control of private keys (if you’re not using a wallet hosted by an exchange)
Disadvantages of digital wallets include:
- Online security risks like computer or smartphone hacking and viruses
- Lack of direct control over your crypto (if a third-party – like an exchange – hosts your wallet)
- Potential loss of crypto assets if your device is lost or damaged
What is a hardware wallet and how does it work?
Using a hardware wallet is the most secure method for storing digital assets. A hardware wallet keeps your private keys offline and inaccessible to digital threats.
Hardware wallets work by generating a set of private keys, which you ought to keep safely offline. The wallet itself is secured by a PIN – and the device will erase after several failed access attempts, preventing physical theft. What’s more, hardware wallets let you physically sign off on transactions, ensuring a further layer of security on each action you make.
Some advantages of hardware wallets include:
- Security – considered the safest option by experts
- Long-term storage of large crypto balances
- Can’t be digitally hacked if kept offline
- Direct control over your crypto
Some disadvantages of hardware wallets include:
- Cost – hardware wallets are the most expensive
- Potentially difficult for beginners
- Less convenient for day-to-day transactions
Crypto will forever be enticing for hackers to steal. But following strong storage and security practices will reduce your chances of an attack. More on how to do that in part three of this series…
FAQs
Q: What is the best way to store cryptocurrency?
A: The best way to store cryptocurrency is by using a hardware wallet. Hardware wallets provide maximum security by keeping your private keys offline and ensuring that your cryptocurrencies are safe from digital threats.
Q: What are the advantages of digital wallets?
A: Digital wallets offer fast transactions, ease of use on the go, and control of private keys (if you’re not using a wallet hosted by an exchange).
Q: What are the advantages of hardware wallets?
A: Hardware wallets are considered the safest option by experts, allow for long-term storage of large crypto balances, cannot be digitally hacked if kept offline, and provide direct control over your crypto.
Conclusion
When it comes to storing cryptocurrency, the choice between digital and hardware wallets depends on your priorities. While digital wallets offer convenience and ease of use, hardware wallets provide the highest level of security. By understanding the advantages and disadvantages of each option, you can make an informed decision that suits your needs. Stay tuned for part three of this series, where we’ll delve into how to hold cryptocurrency safely.
This guide was produced by Virtual Tech Vision in partnership with Ledger.