Many newcomers to cryptocurrency face one problem: storing their digital assets. The industry is still underdeveloped, so we cannot say that cryptocurrency services can compete with banks in terms of security and ease of use.
You can lose cryptocurrency through carelessness, and there are plenty of scammers in the industry. That's why it's worth getting familiar with the main ways of storing cryptocurrency to begin with. This will help you understand the topic better and feel more confident.
Exchange
The easiest and most straightforward way to store cryptocurrency: keeping it on an exchange. When you create an account (we told earlier about registration on the exchange in detail), each user gets his own wallet. It supports all the coins that are traded on the exchange, there is always quick access to them. You can sell or buy more. Also one of the pluses of this option: the ability to easily restore access to your account.
In contrast comes the main disadvantage - the security problems of exchanges. From this point of view, cryptocurrencies remain in the era of the Wild West, because not a single major trading site is left without the attention of hackers. Even executives at major exchanges are urging people not to keep funds on them.
"Please don't keep more cryptocurrency on exchanges than you need to trade. Use Ledger and Trezor (hardware wallets), DEX (decentralized exchanges) is not a panacea, look at The DAO. Open source only suggests that exploits will be discovered sooner (probably by the bad guys)," Kraken CEO Jesse Powell wrote on Twitter.
In 2018, ICORating found that most exchanges (54%) had various security problems. The situation has improved over the past three years. Now it's hard to imagine a site that won't offer to set up two-factor authentication. But hackers are improving their skills. Therefore, you should keep on the exchange only the sum that you are not afraid to lose.
An illustrative case happened with the clients of the Canadian exchange Einstein. Last fall, the exchange owed its clients more than $12 mln, while it had "hard assets" of only $45,000. One trader said the company owed him $535,000, according to another creditor, several million dollars.
You should be very careful when choosing a stock exchange, because there is always a risk of falling for fraudsters. Previously, we wrote about which trading platforms to avoid.
Hardware Wallet
The safest way to store cryptocurrency are considered hardware wallets (devices that often look like a flash drive). But even here everything is not so unambiguous and you need to be extremely careful. For example, in December 2019, the experts of the Kraken exchange found out that the KeepKey wallet can be hacked in 15 minutes, and the attack will cost attackers $75.
However, this method is still more reliable, because criminals need physical access to the wallet to hack it. If it is kept in a secure location, the risk can be minimized.
Last year, the hacking of Binance, the largest exchange by trading volume, doubled sales of Ledger wallets. But they, too, are often found to have vulnerabilities or malfunctions.
When choosing a hardware wallet as an option for storing your funds, keep in mind that losing a pin code will result in the loss of cryptocurrency. Another disadvantage of hardware wallets is the possibility of losing or damaging them physically. For example, it can be broken at home by children or a dog.
Online Wallets
This method has similarities with the storage option on the exchange. The cryptocurrency does not belong to you, and its fate depends entirely on the service where it is stored. Extremely convenient and insecure way. Hackers have a lot of options how to steal funds. For example, hacking the user's account, the service itself, or creating a phishing page. You need to be extremely careful not to keep a large amount of funds in an online wallet.
Depending on how private keys are stored, online wallets are divided into hybrid and traditional ones. The first type wallets use separate storage of keys using multi-signature, the second - the private keys are on the service, and the user has access only to a backup copy.
The main advantage of hybrid wallets is that the developers do not have full access to the user's coins. Payments from such a service cannot be made without joint participation of the client and the company. This increases the level of protection. On the other hand - the loss of a secret phrase will be fatal, in which case you can forget about the cryptocurrency.
One of the most famous online wallets is Blockchain.com. Another popular wallet is BitGo. It is considered secure because each transaction requires two signatures. The platform does not have full access to the user's coins. You can also work with it only after connecting two-factor authentication.
Local Wallet
A universal way to store funds is a local wallet. These are applications for PC or mobile devices, extensions for browsers. Finding such a wallet is easy: just go to the official website of the project and download the appropriate version. But this method has its own difficulties.
The option for mobile devices will suit those who need constant access to their coins for transactions. But cryptocurrency will not be stored on a smartphone, so it can only be accessed if you have internet. Even if the device is lost, the digital money can be recovered.
A local wallet on a PC only makes sense for coins that use Proof of Stake in their algorithm. Because to store cryptocurrency this way, you need to fully download the blockchain of the selected asset. And it can weigh tens or hundreds of GB. In the case of PoS, as long as there is some amount in cryptocurrency in the wallet, and the computer is on, the user is credited with a certain amount in digital money on the balance. This is exactly the function that will appear in Ethereum 2.0. You can become a network validator by keeping 32 ETH or more in your wallet.
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