How To Store Your Cryptocurrency
You just spent money on your cryptocurrency – now, how do you ensure that it is kept securely? The main feature of cryptocurrency is its virtuality, which means that you don’t keep it in a vault or bank or under your bed.
A few important things:
- Decentralized control of Bitcoin means that the safeguarding of one’s coin stash is entirely one’s responsibility.
- The amount of cryptocurrencies you own is recorded on the blockchain.
- To access the cryptocurrencies you own, you need a private key. i.e. storing your cryptocurrencies means storing your private key.
Now, how are private keys related to cryptocurrency storage methods?
Hot vs Cold
Hot Storage refers to private keys that are stored on Internet connected devices (i.e. more vulnerable). They are more convenient to use due to their ease of access. Do note that once a private key is exposed on the internet, it will not provide the same protection as one that has never been exposed.
Cold Storage refers to private keys that are not accessible via the Internet. They are more secure as the private key exists only on the offline computer where it is generated, and is better suited for long-term bitcoin storage.
Ironically, cryptocurrency, which was designed for online use, is largely stored offline.
Types of Wallets
1. Online Personal Wallet Service
Essentially, you access your wallets online via a username and password.
2. Personal Hot Wallet
A personal hot wallet is a software program that runs on a device you own (e.g. an app on your mobile phone). Your private keys are saved on your device and communicates with the network, so you need to be careful about malware and hacking attempts on that device.
3. Paper Wallets
This is one of the simplest, and thus, most popular cold storage methods. It essentially means writing down your Bitcoin address and private key (generated on an offline computer) on a piece of paper and not saving that information on the computer itself. However, note that paper wallets are a one-time use only i.e. if you want to spend only some of your saved cryptocurrencies and keep the rest in a paper wallet, you should immediately store your remaining cryptocurrencies in a new paper wallet. Make sure to prepare your new paper wallet ahead of time!
4. Encrypted Paper Wallets
This is an improvement from the paper wallet, where you write down an encrypted version of your private key on the piece of paper, instead of just squarely writing down your private key. You then decrypt your private key with a password you choose.
5. Offline Transaction Signing
This would be the most basic security method for businesses or users who handle large amounts of cryptocurrencies. Essentially two computers are in play here: the offline computer which holds the private key, and the online computer which does not hold the private key but is essentially the personal hot wallet.
6. Fragmented Private Keys
As the name suggests, this means the private key is divided into many fragments eg. 7 fragments, but any 5 is required to reconstruct the private key. Each fragment on its own is not enough to reveal the private key, which means that even when one fragment is compromised, the other keys which are not compromised are still safe and sufficient to move the cryptocurrencies to another address.
7. Multi-Signature Addresses
As the name suggests, this means that companies can require e.g. any 2 out of 3 keys to spend the stored cryptocurrencies. This means that no single person is able to authorize movement of cryptocurrencies without the signature of the others. This is the most secure and responsible way to manage large amounts of cryptocurrencies.
8. Hardware Wallets
You would already have heard of names such as Trezor and Ledger Nano S – these are small physical devices that act as offline computers to store your private keys. It can be conveniently plugged into your online computer, and is secure as your private key will not be compromised even when plugged into a computer with viruses. The downside, though, is that you risk losing your cryptocurrencies when you lose your device, unless it provides ways to backup the crypto-currencies. For more information on where to buy your hardware wallets in Singapore – check out our post here.
9. Brain Wallets
Essentially, this means that you memorize your private key – i.e. create a memorable passphrase that you commit to memory. The longer and more complex the passphrase, the more secure your cryptocurrencies are. The downside to this is that you must remember it.
No system is 100% foolproof. However, we recommend that you start small and use a storage method that is easy for you before moving on to more secure methods as you start owning more cryptocurrencies.