#ThinkBeforeYouInvest – What is the Safest Way to Hold Cryptocurrencies?

Cryptocurrencies started as an idea to create a financial system void of the mistrust, fraud, and monopoly that has plagued the traditional financial system. The goal was to create a trustworthy, secure, and decentralized system that enabled transactions and interactions between parties involved.

Millions of people now own a currency once rejected by the majority, and with the increasing number of frauds and crypto hacks, security is more important than ever.

Securing Your Cryptocurrency

Bitcoin and other cryptocurrencies are now a big deal that everyone wants a part of. This popularity has come with good and bad, one of the “bads” being theft. The rate at which cryptocurrency theft has skyrocketed is alarming and has spurred the pressing need for people to secure their cryptocurrencies and be educated on how to.

When securing your crypto, you’ll find the dominant word, “digital wallet.” What are digital wallets?

In general terms, a digital wallet is the electronic version of your physical wallet that stores your fiat currency and other valuable items (like identification cards, membership cards, coupons, licenses, loyalty cards, transportation tickets, hotel reservations, and so on.).

In the world of cryptocurrency, there are two basic types of crypto wallets, with one having variations; they are custodial and non-custodial wallets.

Custodial Wallets

“Custodial” is gotten from the word “custody,” and it means the legal right to take care of something or someone (according to the Oxford dictionary). A custodial wallet is a crypto wallet controlled by the cryptocurrency platform you decide to use to transact or start your journey in crypto.

They are the wallets you find on the web pages and mobile applications of crypto exchanges, investing platforms, etc.

They are called custodial wallets because the crypto platforms owns the keys to your wallet and retain the right to “take care of” or “secure” your cryptocurrencies. You must trust the security protocols adopted by the platform or transfer your funds from that wallet to the other kind of wallet we’ll discuss later in this article.

Non-Custodial Wallets

Non-custodial wallets are crypto wallets that confer the responsibility of securing your funds on you. It eliminates third parties. Not everyone is trusting enough; some are gladly sceptical and prefer to secure their funds themselves.

Non-custodial wallets generate something called recovery seed or seed phrase to help you secure your funds. It is usually a string of random words that can be used to retrieve your funds if you forget your log-in details or lose your phone.

Non-custodial wallets can be web-based, mobile applications, or hardware devices. There are two forms of non-custodial wallets: hot wallets and cold wallets.

Hot Wallets

“Hot” wallets here are synonymous with “online” crypto wallets. They are wallets connected to the internet one way or the other, either as web-based or mobile and desktop applications. Hot wallets can be custodial and non-custodial wallets. As a non-custodial wallet, it gives you absolute control over your crypto funds, and since it is connected to the Internet, it makes transactions easier and faster. To top it all, they are mostly free to use.

Hot wallets generate the private keys to your funds online, which means a targeted and successful hack gives the hacker access to your private keys and, by extension, your funds.

Cold Wallets

This is the destination we’ve been driving to arrive at. A “cold” cryptocurrency wallet is synonymous with an “offline” cryptocurrency wallet and is considered the safest way to store your cryptocurrencies.

Unlike hot or online wallets, cold wallets are not connected to the Internet or, better put, do not exist on the Internet. This eliminates the threat of hacking or any online malicious activity. There are two types of cold wallets: hardware wallets and paper wallets.

Hardware wallets

A hardware wallet usually comes in the form of USB sticks that hold your private keys. These devices are crafted so that connecting them to an Internet-connected device or a virus-ridden software does not affect your private keys or funds.

Hardware wallets come in different capacities. Some can store over a thousand cryptocurrencies, while some can only take a few. When you connect the hardware wallet to your device, a usable address to send and receive crypto is generated. Like all non-custodial wallets, a one-time seed phrase is also generated to help with wallet recovery should you lose your hardware wallet.

Paper Wallets

Paper wallets are the other form of cold crypto storage. These wallets are pieces of paper that carry your wallet’s public key and your private key.

Paper wallets have been around since the early stages of Bitcoin and have long been considered the most secure by investors from way back. You most likely didn’t hear anything about paper wallets because other forms of crypto storage have emerged over time.

The Final Decision is Yours

There are different ways to store your cryptocurrency, but how you want to store them is a chose made by you. Cold, hot, custodial or non-custodial wallets all have their ups and downs; the ball is in your court to weigh your options based on your preferences.

Cryptocurrencies are a big deal that many people will do anything to get their hands on. You owe yourself and the cryptocurrencies you have to keep them safe. It is advisable to work with more than one digital currency wallet. Remember the basics always; you can never go wrong with a very strong password, a secured seed phrase and private key, and a cold wallet for larger crypto holdings.

(The author is Mr. Johnny Lyu, CEO, KuCoin and the views expressed in this article are his own)

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