For all beginners who wanted to understand the world of digital assets, the question later arises: where to store cryptocurrency ? In this article for the educational platform about cryptocurrencies and blockchain technology - TseCrypto, we reveal the main types and methods of crypto storage.
At the first stage of investing in cryptocurrency , you can transfer your funds to trust funds or companies that are engaged in the purchase and storage of coins that interest you, or you can store and manage your digital assets yourself.
Two types of crypt storage: hot VS cold
Most of the average users who choose the path of self-use begin to get acquainted with the storage of cryptocurrency after buying it on the exchange. 90% of novice crypto-investors create an account on one of the trading platforms, invent a login and password, getting access to a personal account, where they can see the number and name of purchased tokens . When the amount for the user becomes significant, he begins to think about alternative methods of storage, and then he gets acquainted with the fact that the crypto industry divides methods of storage into two opposite types: hot and cold. In fact, these are conventional names due to the fact that hot wallets are constantly connected to the Internet, while cold wallets are not.
Principle of operation
To work with cryptocurrency , regardless of the storage method, you need private and public encryption keys. In simple terms, a public key is an individual address to which digital assets are forwarded. Private is the key that confirms the transaction. In the case of hot storage, your private keys are stored by services and exchanges, and in the case of cold storage, the hardware wallet or you personally store your private keys. To restore private keys, so-called seed phrases are used, this is a sequence of words generated in a special way, which is a so-called backup in case of loss or damage of the device.
Hot storage
Hot storage can include various software wallets, applications and exchanges. In most cases, access to assets is similar to accessing regular e-mail or a mobile application installed on your smartphone, which requires a network connection to interact with them. Exchanges and various platforms are also called custodial services, and such wallets are custodial . Software ones are those that you download to a computer or smartphone.
Advantages of storing cryptocurrency in hot wallets:
- gives you more tools to use your coins (exchange, buy, other trade)
- mobility of use without additional devices
- suitable for conversions with fiat money, trade.
Cons of storing cryptocurrency on hot wallets:
- vulnerability to hacker attacks
- loss of funds in case of fraud by owners of exchanges or services.
Example of hot wallets: Exchanges Binance , Coinbase Software MetaMask , Trust Wallet .
Cold storage
Cold storage is the storage of cryptocurrency without access to the Internet, a connection to the network is required only at the moment when the user needs to make an operation. Such wallets should include simply records on paper or hardware wallets - physical devices that store your private keys, transactions are signed manually by pressing buttons directly by the owner of the wallet. In most cases, private keys are stored on paper in the form of a seed phrase.
Advantages of storing cryptocurrency in cold wallets:
- cybercrime protection, private keys belong only to you
- it is an ideal option for long-term storage of large sums
Cons of storing cryptocurrency in cold wallets:
- not always have all the tools for quick exchange and other opportunities provided by exchanges and applications.
Example of cold wallets: hardware devices Ledger , Trezor . Metal tablets for manually writing seed phrases.
So which method of cryptocurrency storage to choose?
Both options for interaction with digital assets are popular among users. Hot storage of digital assets can be compared to banking applications, through which it is convenient to make purchases, convert currency, pay for services, and more. It is cold to compare it with a safe to which only you have access. Based on the above, you should make your own decisions and evaluate the pros and cons of storage methods.
In our opinion, the ideal use case would be to choose a hardware wallet with the further option of connecting to hot storage services, then you would enjoy all the features of online wallets with physical confirmation of transactions on your device. Investments in digital assets must be protected and distributed in such a way that at the right moment you have no problem accessing and using your funds.
