How to Keep your Bitcoin Safe

November 8th, 2021

How to Keep your Bitcoin Safe

Purchasing and exchanging crypto is easier, and more mainstream, than ever before. As blockchain technology becomes more integrated with the times, even a beginner can find comfort in how easy purchasing these assets has become. In most cases, simply link a debit card to an app and in minutes be a crypto investor. However, one detail is often overlooked by the novice crypto enthusiast – how to take custody of your holdings. Unlike traditional fiat currency there are no central banks to turn to, if you are looking for a place to park your money. This means it is the responsibility of the crypto holder to find a place to not only purchase, but also store these digital assets. This is, of course, done completely digitally, on a digital wallet.

There are two main types of digital wallets: hot wallets and cold wallets. Simply put, hot wallets are connected to the internet (usually acting as exchanges as well), while cold wallets are offline and not directly linked to an exchange or internet. There are many benefits of each, while both having caveats.

Hot wallets are the most commonly used form of digital wallet. This is because they are extremely convenient, usually being able to be accessed by smart phone or mobile device and are very user friendly and easy to set up. Just like traditional banking there is a wide variety of companies offering enticing perks and incentives to earn your business, and store your coins with them. The most common of these incentives is interest paid on the coins you hold, providing an excellent way to earn extra crypto, while parked.

Hot wallets can be accessed in seconds on any internet ready device and are truly meant for everyday use. They allow users to link their crypto to other applications such as PayPal or Apple Pay to make quick purchases in-person or online. All the user needs to do is log in and they have instant access to these benefits.

However, simply logging in and providing a username and password could cause slight alarm for a security conscious user. These concerns would be valid and will be addressed. The way hot wallets are designed, they are meant to help provide quick access to the blockchain, and effectively process transactions on-chain. This means the provider of these hot wallets holds your private keys. Private keys are similar to a bank account PIN number. They are necessary to allow access and initiate transactions, or view account balances.

Public keys are more like usernames, providing an identity to the wallet without compromising the user’s identity. Hot wallets are potential targets for attacks because they store this information online. Anything connected to the internet has the potential to be compromised. Hot wallet users having security as a priority is crucial to keeping these assets safe. The username and password should be difficult to guess and not shared with anyone. If the wallet has an option for two-factor authentication, this provides another layer of security, and is highly recommended.

On the contrary, cold wallets are a more secure “storage” offline. They are not as quickly accessible, often taking a few minutes to input the safely guarded seed phrase or private keys. Cold wallets are often referred to as hardware wallets, because a thumb-drive style hardware device is used to connect via USB to access your account. Once your device is linked to your computer, it will prompt you to enter your private key or seed phrase. A private key is much like a PIN 4–6-digit number of your choosing. A seed phrase is a completely unique 12, 18, or 24-word phrase generated by your cold storage provider, allowing access to the cryptocurrency you hold. The seed phrase is essentially at the core of the private keys. It is often referred to as the master key. If it were a hotel, even if all the individual room keys were lost, the master key would be able to access all rooms. The same can be said of the seed phrase provided to you. These seed phrases are completely unique and should never be shared with anyone. Storing a copy in multiple secure places would be wise. Many go as far as to etch these words onto a fire-resistant, chemical-resistant titanium card and store that card in the most secure location available. This is the thumb print of your crypto account, and those most interested in long-term stockpiling of these coins, and digital assets, should strongly consider this option.

As stated, these cold wallets are offline, meaning crypto must typically be sent directly to these accounts using the proper wallet address for that coin. This option is in essence a way to become your own Fort Knox for your 21stcentury better-than-gold digital assets.

Many experienced crypto “HODLers” have both hot and cold storage wallets. The hot wallet acts as the first line for purchasing, trading, and exchanging cryptos for cash, other cryptos, and/or NFT’s. While the purchase is taking place, a timeline of the investment is typically established, meaning the user must determine if they are going to buy this for short-term moves, or if they plan on stockpiling and accumulating a mass of these coins, in a more long-term investment. Those interested in short-term trading may choose to keep their newly purchased crypto on the hot wallet exchange, allowing for quick liquidation back into USD or exchanging to another crypto. This also allows the novice to not get overwhelmed with the added “layers” of the cold storage process. However, if someone is looking to purchase these coins and essentially never sell them or as crypto enthusiasts say HODL, meaning hold on for dear life, cold storage is certainly the most secure option. Allowing these coins to be parked offline and with added layers of security, like private keys and seed phrases, as well as hardware, creates a much more secure cyber bank.

Furthermore, there are companies that act as custodians, allowing you to open an account, deposit your funds to their offline cold storage wallets, and allow them to act as a middleman for you and your cold stored crypto. This is typically done for institutional grade investing, due to the massive amount of assets under management, and corporate structure. These companies typically house underground vaults, accompanied by military-grade security measures, and are literally a modern-day Fort Knox for cryptocurrency. The crypto owner would work directly with these custodians to move or transfer any of their cold stored funds to another location, essentially giving the investor a “person” to go to if they need these funds secured, but don’t have the time or background to cold store these assets themselves.

This disclaimer informs readers that the views, thoughts, and opinions expressed in the text/sponsored content belong solely to the author, and not necessarily to Bitcoin of America, organization, committee or other group or individual. All investments are at your own risk and should be done after careful research.

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