Digital Currency Storage
The cryptocurrency market is still maturing and as of early 2018 we are still waiting for standardised security solutions when it comes to storing your coins. The fundamental difference with crypto is that you now become your own bank. Being your own bank means taking full responsibility for all the advantages/disadvantages that comes along with that kind of life choice. This is important to understand.
Remember that to store your funds you need a public key and a private key. Your public key is the address that others will need to send you funds and your private key (which only you should have) is the address used to unlock your wallet/funds. Read more on public/private key cryptography here.
There are currently 4 ways to store your digital currency:
- On an exchange like Coinbase or Luno
- In a software wallet on your PC or mobile phone
- Paper wallet
- In a hardware wallet
This is the easiest and least responsible way to store your money. Companies like Coinbase and Luno will store your crypto for you on their servers or in many cases in cold storage. This means they will store them offline in some sort of hardware wallet. In theory they can never be hacked or stolen this way. Of course at some point when you want to transfer your crypto you will again need to connect to the net. Exchange storage is good for traders and people who don’t want the hassle of storing their own funds.
The disadvantage of this option is that you have to trust a company with your funds (the main reason crypto was created in the first place, to move away from trust systems). In most cases you have no way of knowing if your funds are indeed offline as they claim. Employees in charge of securing funds will be a potential weak point. Exchanges are also targets for Government regulation and may be targeted or taken offline without much notice. Finally, exchanges are known as “honey pots” because a large amount of crypto is centralised at these locations. These are attractive targets for hackers.
Also know as hot wallets because they are usually always connected to the internet and therefore more susceptible to attack. Some solid examples of software wallets are Exodus and Bread. Software wallets are the longer term goal for cryptocurrency adoption. After all, we want to be able to go into a grocery store and make quick and convenient payment with our phones.
I bet many of you didn’t think this option was possible! Paper/mind wallets being probably the most inconvenient option are the best way of getting your money out of a country/location with strict and oppressive controls. If you were stopped at the border, no problem, the only thing you would need to recover your funds would be a 24 word mnemonic seed. You could of course memorise this and get through border control without any problems. In that case your funds would not be compromised somewhere on a piece of paper.
Hardware wallets are the safest option. Also known as cold wallets, they are only connected to the internet when transactions are signed and sent with your private key. Below we have an example of a hardware wallet I use, called the Ledger Nano S. Your wallet’s private key is stored on the hardware itself and is much harder to hack than alternative methods.
I believe in the future your best option will be to use a combination of software and hardware wallets. Software wallets will most likely be used for daily transactions of small amounts when heading out the shops or paying for coffee, etc. Larger transactions like buying a house or car will require safer solutions to manage like hardware wallets. The industry is still quite fragmented with many different wallets to manage. This is of course the early days of crypto, so expect this to change, with much better solutions coming online in the coming months and years ahead.