When investing in crypto, theres often a great deal to learn about such a dynamic and constantly evolving form of wealth building. Perhaps one of the most fundamental lessons is how best to store your crypto coins or non-fungible tokens (NFTs) to ensure their long-term safety.
This is a point that was made abundantly clear amid the recent overnight crash of FTX, which was the second-largest and fastest-growing crypto exchange. The full ramifications of FTXs insolvency and demise remain unclear, but many investors who had stored cryptocurrency on the exchange stand to lose a great deal.
In the aftermath of FTXs downfall, more than a few experts have stressed the importance of always storing cryptocurrency in a self-maintained wallet rather than an exchange.
What are crypto wallets?
A crypto wallet is a device designed to store and transfer your cryptocurrency through whats called self-custody. That means instead of going through a third party, like a bank or financial institution, youre able to store your crypto on the blockchain and access it using a private key (more on that later).
There are two primary types of crypto wallets: hardware and software. Software wallets allow for securely storing crypto online, while hardware wallets allow cryptocurrency owners to buy physical hardware similar to a USB drive and store coins offline in that device. Once safely stowed on the hardware, your crypto wallet can then even be further secured by locking it in a safe or putting it in a safe deposit box.
One of the most important benefits of either form of self-storage for cryptocurrency is that the assets are protected by private key cryptography, which is similar to the technology used to secure your credit card information when you make a purchase online.
Those keys are what secure your assets, explained Josh Fraser, cofounder of Origin Protocol, a company that created Origin Dollar, a yield-bearing stable coin, and Origin Story, an NFT platform. What it looks like in practice is a series of words that basically generate this private key and secure your assets.
In addition to hardware and software wallets, there are also whats known as hosted or custodial wallets. But to be clear, these are not self-custody wallets. Rather, they are a form of storage hosted by brokerages or online platforms. And depending on the brokerage or platform, this approach may be less safe, as the FTX implosion illustrated. If the brokerage fails or does not handle your coins responsibly, the investment can be lost.
Deciding the best wallet to use really depends on the type of person you are. If you have difficulty keeping track of passwords, accounts and other important information, then you should consider using a custodial wallet provider, like Coinbase, who can help you get back into your wallet in case you forget your password, says Tyler Moebius, co-founder of SmartMedia Technologies, a leading creator of Web3 and blockchain solutions. However, if security and privacy are your priority, then you would want to choose a self-custody solution.
How to create a software wallet
Setting up a wallet is a simple, straightforward process that can be completed in just a few steps.
Step 1: Select a software wallet app you want to use. The first step is to do your research and find a software wallet provider you like best. There are numerous options that provide various levels of security, ease of access, customer service, and price points.
Its also important to keep in mind as youre searching, that some platforms offer the ability to store your wallet on both your desktop and smartphone, while others may only offer one of those options.
Step 2: Download the wallet app to your phone or computer. Once youve settled on the software wallet youll use, the next step is to download the wallet app to either your phone or computer.
Step 3: Create an account. The good news about many software wallets is theres not much involved in getting your account established. For instance, few require any personal information at all, according to Coinbase.
Step 4: Transfer assets. Once your wallet is established youre ready to go and can begin transferring cryptocurrency into your wallet. Often this means transferring crypto from an exchange or brokerage to your software wallet.
People typically fund their wallets using centralized exchanges like Coinbase, but you could also have a friend send you some crypto in exchange for cash or another form of payment, says Fraser. If you do use a centralized exchange, the best practice is to move the assets to a wallet you control as soon as you can.
There is one important caveat to software wallets to keep in mind. You are in charge of maintaining the keys to access the cryptocurrency assets, which can be problematic if you lose this information.
If you choose this option, you alone are responsible for the safekeeping of the cryptographic keys that secure your assets. The stakes are high, however. If you lose the private keys, your assets are gone forever, said Fraser.
This means you probably want to back up your private key information in multiple secure places. But you also need to be careful about those backups, because anyone who accesses your private keys can take all the assets that those keys are securing, Fraser adds.
How to create a hardware wallet
Hardware wallets allow for storing cryptocurrency offline, which can be an added layer of security or comfort for some investors. The hardware is similar to USB drives and as such is a very mobile form of storage. The wallet can be taken with you anywhere. Setting up this type of wallet is equally as easy as a software wallet.
Step 1: Select the hardware you want to use. There are various crypto wallet options available. Some of the top names in this space include Ledger, Trezor, and Keepkey, according to Coinledger. Some of the hardware options are more budget friendly, while others are easier to use or offer higher levels of security.
Step 2: Purchase the hardware and install the software required to establish your wallet. After purchasing the hardware wallet that best suits your needs, the next step is typically to install the software it comes with, Coinbase explains. Each hardware wallet has its own software that allows you to manage the contents of your hardware wallet.
Step 3: Transfer your cryptocurrency. Once your hardware wallet is established, you can begin transferring cryptocurrency from elsewhere such as an exchange or brokerage.
The takeaway
Self-storage of cryptocurrency is highly recommended by experts. It allows for managing your crypto assets on your own and keeping them within your possession. But its important to do your research and carefully assess whether a hardware, software, or custodial wallet best suits your needs.
