Intro
In recent years, cryptocurrency has firmly entered our lives, proving to the world that this is not another Ponzi but a technology that can change our understanding of finance. More and more people are entering the crypto space, exploring the possibilities of digital assets, using cryptocurrency for payments, and making a profit. However, before investing in cryptocurrency, it is necessary to think about a way to store it safely.
What Does Crypto Custody Mean?
Today, cryptocurrency is experiencing incredible popularity. Every investor who has invested in this industry believes that someday it will skyrocket because there are supporting facts. But the difficulty is how to store cryptocurrency.
A cryptocurrency wallet differs from a traditional one because it does not have a central issuer since the data is on the blockchain. This allows everyone to see the users’ transactions, but there is no information about the user.
Another difference is that crypto custody solutions do not actually store coins but only provide convenient and specialized software for managing your funds (see what balance, see all transactions, make transfers, etc.).
Cryptocurrency does not have a physical embodiment but is some code that appears in the course of complex mathematical calculations. To transact crypto, we use public and private keys.
Public and Private Keys
A private key is a set of characters consisting of numbers and letters that open access to the stored currency. Roughly speaking, those who own this key can dispose of your cryptocurrency.
The public key works in tandem with the private one and is generated independently after the private key is created. This is an address to which you can send cryptocurrency.
Let me give an example: the private key is the key to the apartment, and the public key is the address of the apartment that everyone can know.
Key Storage
Depending on the method of storing keys, crypto custody solutions can be divided into two large categories — cold and hot storage.
Cold storage
Cold storage of cryptocurrencies is currently the most reliable. The key feature is that the wallet does not have access to the Internet and is correspondingly less vulnerable to hacker attacks. The cold storage method is suitable for those planning to invest a significant amount in cryptocurrency for a long time. Access to the cold wallet is only done by providing a private key.
Hot storage
Hot wallets for cryptocurrencies are always connected to the network and have access to the blockchain. Unfortunately, where there is an Internet connection, there is always a risk of data theft. Therefore, large amounts are not stored in hot wallets; they are used for frequent transfers. However, the hot storage of cryptocurrencies has the advantage that it is very convenient. This saving method is the simplest, and most importantly, there are many hot storage services for cryptocurrencies.
There is a more detailed classification of crypto custody solutions, taking into account the parameters, implementation features, and other criteria:
| Cold Storage | Hot Storage |
| Hardware Wallets | Software Wallets |
| Paper Wallets | Exchange Wallets |
| Third-party Wallets | |
Types of Crypto Custody Solutions
- Self-custody
This type of private key storage is characterized by high security, but it is associated with some inconveniences. In the case of self-custody, the user is solely responsible for the safety of the private key. This type is divided into hardware, software, and paper wallets.
- Hardware Wallets
A hardware wallet is crypto storage in the form of a physical device the size of a USB flash drive. Information about the user’s funds and access data is recorded on such a device. For transactions, you need to connect your device to the Internet. Information is always safe. Private keys are protected by encryption. Hardware wallets are equipped with a display and have control buttons. Among the disadvantages is the high cost.
- Software Wallets
Software wallets include desktop, web, or mobile wallets. Desktop, in turn, can be divided into two more subspecies — “thick” and “thin”. Each option has its advantages and disadvantages. For example, thick wallets have a very high level of security. When installing such a wallet, the entire blockchain is downloaded, and in the future, when performing transactions, the program only needs to update the chain. Access to such a wallet is possible only if there is a private key, the loss of which leads to the loss of funds on balance.
Thin wallets take up less hard disk space, usually several tens of megabytes. This is the size of the program itself. Such apps do not download the full blockchain, and they synchronize faster. Interaction with the blockchain is carried out through separate servers.
- Paper Wallets
A paper wallet is a way to safely store cryptocurrencies best suited for long-term investors. A paper wallet is a small piece of paper showing two keys — private and public in the form of QR codes. Of course, this type of storage must be hidden from outsiders. You can print such a sheet using some services where a private and public key is generated.
- Exchange Wallets
Many platforms for trading digital assets provide additional services provide storage. With this storage method, the private keys are located on the exchange’s servers. The user does not have full control over the coins. This creates certain inconveniences and the risk of losing money. The main advantage of this method is quick access to cryptocurrency trading, which is important for traders.
In addition, since all operations take place in an online environment, there is no need to download the software. Exchanges are often attacked by intruders who steal funds. Therefore, the risk of losing savings is much higher than in other cases. It is recommended to store cryptocurrencies in an exchange wallet in the amount necessary for trading.
Third-Party Custodian
Browser wallets belong to this type of storage. These are services that provide their software through ordinary authorization on the site. These services belong to a third party, and the developers take responsibility for storing private keys on their servers. Such wallets have a user-friendly and intuitive interface, maintenance, and quick access to cryptocurrency. The advantages of such services include fast registration, no need to enter personal data, speed, and convenience of work.
What Is a Seed Phrase?
It is recommended to keep the keys secret and observe the rules of digital hygiene. If access to the cryptocurrency is lost, only the seed phrase generated by the wallet will help restore it. It is important not to skip this step when setting up your wallet. A mnemonic phrase consists of 12, 18, or 24 disconnected words. It is difficult to remember this text because it has no logical meaning. You need to write down the mnemonic phrase and store it safely.
Final Thoughts
Cryptocurrency can be kept in hot and cold storage. It all depends directly on your goals. You have two options if you act like an average user or trader. This is a custodial or exchange wallet if you want a multi-currency portfolio. If you are an investor planning to acquire many assets and invest for a long time, then your option is a cold hardware wallet.
If you do not want to spend money on buying a hardware device, you can use the paper version. It must be remembered that the safety of savings depends on the owners themselves. Choosing a crypto wallet also ensures the comfort of using digital assets.