This article is one of a three-part series on the basics of getting started in crypto. To read from the beginning, visit Part One here.
You’ve successfully navigated the cryptocurrency exchange waters, and have made your first crypto purchase! Now what? You have a few options for storing your funds. A lot of what you choose depends simply on your preference, your comfort level with tech, and how much you trust yourself versus how much you trust others. Here are three of the most common options.
Leaving Your Crypto on an Exchange
There are a lot in the crypto community who will scream at you not to do this. They have a reason – there have been exchange hacks ad infinitum since the dawn of crypto, not to mention you don’t have full access or control over your funds (think bank freeze or capital controls, for example). There is also the inherent risk of any one of a million potential mishaps involved in trusting any third party with your money. That said, there may be a few benefits to keeping your funds on an established, regulated exchange. It’s important to remember that cryptocurrency exchanges are not FDIC insured, and that the sheer volume of funds that travel through these exchanges do make them bigger targets for hacks. Yet the survival of large companies like Binance, Gemini, and Coinbase depend on keeping customer funds safe. Investing millions of dollars and thousands of hours to continually surveil and protect their networks, security is baked into their business model. Additionally, most large exchanges store the majority (even up to 98%) of their customers funds offline. Called “cold storage,” these funds are physically isolated from having any internet connection.
The biggest benefit of trusting an exchange with funds, for many people, is that you don’t have to trust yourself – you leave the security of your funds to an entity with more experience and more wherewithal with which to protect those funds. Besides just leaving your funds parked where you bought them, some exchanges also offer additional options for storing your assets, like Coinbase’s “Vault.” Storing crypto in the vault, for example, creates an automatic forty-eight hour time delay for any withdrawals requested from the vault. While leaving your funds on an exchange carries its own set of risks, security is at the top of the list for these multi-million and billion dollar companies, and many carry private insurance (usually to the tune of about $100 million) in the event of a security breach as well.
Using a Mobile Wallet
What’s a mobile wallet? At its simplest, it’s an app that stores your funds on your phone. That said, because your funds are largely under your control, you have to go through a few more steps to set it up. Meanwhile, the safety of your funds is likewise more of your responsibility. The obvious benefit here is avoiding all the risks we just described above. New risks, however, involve the fact that now security of your phone itself is more important than ever. Setting up security measures such as a strong PIN on both your phone and the app and being able to wipe your phone remotely in the event it’s ever stolen are just a couple of the precautions anyone using a mobile wallet should take, amongst others. The other risk of using a mobile wallet is that, since you’re the only one in charge, you want to make sure you don’t forget or lose your information as there’s no customer service that will be able to help you access your funds in the event that you do. There are numerous mobile wallets available for use, and you’ll want to do your own research before selecting one, as some are highly reputable while others have been known to have security flaws. (As with most apps, steer completely clear of downloading anything that’s not from the Google Play or Apple App store.)
Once you’ve chosen your wallet, setup just takes a few steps. A wallet will give you what is called a “recovery seed,” or a phrase of about twelve random words that you can use to recover your wallet should you lose access to it for any reason. This is the most important security feature of your wallet, so you’ll want to write it down and keep it somewhere safe. Meanwhile, since your funds are still on the exchange where you purchased them, you’ll need to transfer those funds to your new wallet. It may seem slightly daunting to think about just because it’s different, but it’s a pretty straightforward process of going into the exchange and following the prompts in order to withdraw funds to your wallet’s address (which is basically a bank account number, just with numbers and letters).
Hardware wallets are the preferred storage method of most crypto enthusiasts. Again, there is a reason – since they, like funds in cold storage, are highly protected by being completely offline. Neither connected to the internet through a third party such as an exchange, nor to the web or other mobile network through your phone, funds kept in hardware wallets are one of the most secure forms of storage in terms of vulnerability to hacking and the like. Although, going back to what we mentioned in the first paragraph, hardware wallets are, like mobile wallets, much more vulnerable to human error. Yes – even if that tiny, USB-sized tool gets eaten by the dog or dunked into orange juice by a wandering toddler, you can still restore your crypto as long as you have your recovery phrase. If, however, it’s eaten by the dog and the paper with your recovery phrase gets tossed by the cleaner or otherwise goes missing – so does your crypto.
Like most technologies, hardware wallets are evolving. However, the field is still fairly narrow with the two most popular (and with the longest track records) being Trezor and Ledger. They’re purchased directly from the manufacturer, and will connect with your phone or computer in order to get up and running. Instructions from either Ledger Live, a downloadable user interface, or the Trezor website will guide you through setting up your device and transferring your crypto from an exchange. Afterward, you can leave your crypto safely stored (preferably in a home safe, safe deposit box, or similar), or use your wallet to make crypto transactions, knowing that your funds are completely safe from remote attacks.
Each of these options will allow to monitor your newfound crypto balance, as well as make transactions if you choose to do so. Beyond that, each comes with its own unique benefits and risks, and each will fit a person’s needs differently. While always keeping security in mind, whether you keep your funds on an exchange, in a mobile wallet, or in a hardware wallet is up to you.