Introduction
We will go over What Is The Safest Way To Store Cryptocurrency.
Did you know that you do not own the crypto unless you have complete control over it?
Read on and I’ll explain what I mean by having complete control over your crypto. In reality when you make a purchase in one of the popular stores such as coinbase, binance or kraken you don’t really fully own the crypto currencies. This is due to the fact that the purchase is being made using someone else’s keys.
I know this may sound a bit confusing at first but this is the reality of things. In this article I’m going to try to break this down in layman’s terms to make it simpler to understand so you can have complete control of your investments.
We will break down this in the following sections:
- Who owns the crypto when you purchase on an exchange
- How To Store Your Crypto
- Which is the safest way to store crypto
I have used all methods that I’m going to describe here but I’m going to focus on which one is the safest way for you to store your crypto without losing any money or assets.
Please keep in mind I’m not a financial advisor and any information provided in this document should be taken with a grain of salt. I’m providing a developers point of view that’s highly technical and understands how crypto works at the lowest level.
Having said that I believe having a fundamental understanding can help you make your decision on how to store securely your cryptocurrencies.
Who Owns The Crypto When You Purchase On An Exchange
I would say 99% of the transactions that most people do happen directly through an intermediate crypto exchange. The most popular ones that people use these days are the following:
- Coinbase
- Binance
- Kraken
Having said that you need to understand that when you make a transaction there via their app or web interface the crypto you are purchasing with your FIAT currency is not yours. Yes you heard that right the crypto you just purchased is not your property!
The exchanges themselves have said repeatedly and put it everywhere from fine notes to big posts in the news.
Not your keys not your crypto
That popular quote made by coinbase not long ago basically signals one fact that everyone that’s on the tech world already knew. But to better understand this in layman’s terms I will try to illustrate it for you.
A transaction has two parties:
- Receiving end – This is the person buying the crypto
- Selling end – This is the person selling the crypto
When you are on an exchange the receiving end which is your account is not actually you, it’s basically the exchange itself. The reason it’s not you is that in order to receive some crypto you need two things:
- A crypto address – this is like a location where the crypto goes too, you can think of it like an IP address or website name
- Some encryption keys – These are used to facilitate and secure the transaction
Offcourse there’s other things involved here like the crypto protocol etc but those don’t really matter for the point we are trying to make.
Since you as an initiator of the transaction from the exchange website or app do not have any of those two, the exchange provides them for you in an abstracted way. So basically the transaction is really taking place between these two parties:
- The exchange you are on this could be coinbase or any of the ones listed earlier
- The selling person, this can also be an exchange by the way facilitating it on behalf of one of their clients
Now that we have one important fact clear I think it should be obvious to you that the crypto that you purchased on the exchange is not your property legally and technically. What this means is unless you decide to transfer or store this crypto on something you really own the exchange can in theory (and practise sometimes) can do whatever they want with your crypto.
But you’d say when I buy stocks or exchange foreign currency there’s some guarantee in the US at least. This is not the case with crypto you are basically unprotected and do not have this kind of buffer. This means if lets say you were storing your crypto in coinbase and then coinbase one day went bankrupt you would lose everything you owned if they decided to liquidate it.
So now that these things are clear to you in a very abundant way I’m going to tell you what options you can use to store your crypto and which one is the best solution for you.
How To Store Your Crypto
In the previous section we went over why your crypto is not safe when you first buy it. Here we are going to break it down in more detail on what options you have in order to store your crypto. Keep in mind not all of those are ideal I will cover this in a later section of this article and give you many reasons of why I believe you should be doing this.
Exchanges
Lets start with the exchanges which is what 99% of the people use to first buy their crypto. As discussed earlier the exchanges basically act as a middle man to store the crypto for you until you move it offline to a cold or hot wallet that you control. They are basically a user interface for you that has a mapping between the crypto you received on their behalf and you.
Essentially the crypto still lives in their wallet and they can do whatever they want with it until you take it out. In theory if the company is in business and good standing this should not be a problem for you and you can basically keep your crypto there indefinitely if you wanted too. The reality of things is though why even bother doing this when there’s better options.
I’m glad you asked so keep reading on we are going to cover two other methods you can use that are much better than the exchanges to store your crypto.
One thing to be aware is that as of late 2022 Crypto exchanges have been suffering with major hits and a lot of them have gone flat out bankrupt (ie FTX). The reasons to start storing your crypto in a cold wallet is increasing. Use the crypto exchange as your last resort only if you want to make movement of your crypto coins.
Hot Wallets
The first alternative to storing your crypto in an exchange is to use a wallet. A wallet is basically a virtual wallet that contains a bunch of encryption keys along with a virtual address. That address along with your keys are used in your transactions to facilitate and safely secure the crypto you own.
Starting with hot wallets basically this is short for any application or software that runs on your laptop or phone device. This means all your keys and everything needed exist in your phone or personal computer. Since this isn’t the most secure way to do this I do not think it’s ideal but it’s much better than having it on someone else’s wallet like an exchange.
A hot wallet is vulnerable to attackers breaking into your computer retrieving the keys that are stored in your hard disk and getting all your crypto for them. Since it’s all software based there’s no extra layer of protection there and anyone with access can retrieve them.
Cold Wallets
Now that you have an understanding of what a wallet is and how it’s beneficial for your crypto journey we can go over a bit more advanced on the topic of wallets which is cold wallets.
Basically a cold wallet is a form of storing your crypto offline in a storage device such as a ledger. Since inception there has been a lot of advances in the wallets and new technologies have merged. To summarize a hardware wallet basically lets you store your cryptos offline and also takes care of storing your encryption keys in a more secure manner.
The idea here is that if your computer or phone got compromised someone will not be able to access your crypto. The reason for this is that all the information needed to make transactions and access the wallet are not stored in your computer. Instead they are stored on a separate external device which has everything needed to facilitate transactions and checking balances.
As you can understand this tightens the security of your portfolio of cryptocurrencies. In my opinion this is a must if you want to be serious about crypto because it provides two things nothing else does:
- You own your crypto
- It’s stored securely offline on something other than your computer/phone
These two important factors make it very difficult for an attacker to gain access and steal crypto from you. They would have to first find the hardware wallet and from that derive whatever authentication you have configured on it and then be lucky for you to have it connected to your computer.
Offcourse the part of the physical security is also important as some of them now rely on more advanced biometric information besides putting in a normal digit pin. I’m expecting this to get better in the future and they would reach a level of security as phones have on the unlocking portion of it.
Which Is The Safest Way To Store Crypto
From the sections above it should be clear by now which is the safest way to store your crypto. To me the only type of storage that satisfies the two requirements of:
- Own your crypto
- Two layer security
Are cold wallets in particular hardware ledgers. The first one while it may not be very obvious to most people since they do not know that the exchanges own your crypto it’s much more important since you are risking of losing everything.
In the second scenario it’s imperative that you introduce the hardware level of encryption to prevent attackers from stealing your coins from the software wallet. It must be said here that if you store your crypto in an exchange you also risk losing them if there’s a hack in the exchange itself. This has happened twice in history and if we learned anything we will know that it’s bound to repeat itself again.
So stay safe and keep your crypto coins in a cold wallet particularly a hardware ledger. I have written a lot of articles on ledgers that are available in the market and what I use on my day to day transactions. The articles are linked below which can hopefully give you some recommendations on what’s worth buying.
Conclusion
We were able to successfully go over What Is The Safest Way To Store Cryptocurrency, hopefully I answered any questions you may have had and helped you get started on your quest of selecting the right way to store your crypto safely.
If you found this useful and you think it may have helped you please drop me a cheer below I would appreciate it.
If you have any questions, comments please post them below or send me a note on my twitter. I check periodically and try to answer them in the priority they come in. Also if you have any corrections please do let me know and I’ll update the article with new updates or mistakes I did.
How do you store your crypto?
I personally have all my crypto off in cold wallets. I particularly like to leverage hardware wallets such as the Ledger which I have spoken about in other articles which you may find links too below. I do have to mention that initially due to simplicity I purchase my crypto via binance and sometimes coinbase as it’s convenient. I’m aware you can directly make purchases via the exchanges these days and bypass the middle man.
You can find more information about some hardware wallets and exchanges in the links below:
If you would like to find more articles related to Python: