Cryptocurrencies empower you with the means to truly ‘own’ your wealth, should you choose to do so. Many position digital money as being a worthy competitor to PayPal and similar payment platforms, though various aspects (notably storage and security practices) more closely mirror the recommended protocols for storing and securing physical assets such as precious metals.
A Crash Course in Storage
Given the self-sovereign nature of these networks, you’re presented with two options – to entrust a custodian with your funds, or to take possession yourself. The former is often easier for newcomers, if only as a stepping stone to self-custody: the protection of your funds is outsourced to the custodian – most commonly an exchange – meaning that you need not wrangle with complex concepts such as air gapping or properly backing up seed words.
For traders, custodians are a necessary middleman – decentralized exchange technology simply isn’t mature enough to offer the performance of centralized counterparts, so the only way to tap into large pockets of liquidity is by relinquishing control over your own funds and turning them over to an exchange.
Of course, as the old cryptocurrency adage goes: not your keys, not your coins. Time and time again, we’ve seen the catastrophic consequences of exchange breaches, where malicious actors compromise the security of these third party custodians. There is little that you can do in this case, other than pray that your funds will be reimbursed.
Conversely, full self-sovereignty mitigates the reliance on third parties, at the cost of ease-of-use. Cold storage solutions are becoming more accessible, but setting up something like a hardware wallet (not to mention running and using your own node) is not a task that can be accomplished with ease by the less technologically-inclined.
Other solutions – think desktop/mobile wallets – fall somewhere in between these two extremes. They’re straightforward to use, store private keys on the device itself, and enable you to make a backup. These are often the mediums that users will discover after purchasing their first coins. The only downside with mobile and desktop wallets is that they’re only as strong as the device that they run on, and a lot of attack vectors exist on an unsecured system.
So Which One Is For Me?
It’s difficult to give a one-size-fits-all answer, as each investor will have a different risk profile: on one end of the spectrum may be a Bitcoin maximalist whose only goal is to accumulate Bitcoin by purchasing it monthly and sending it directly to a hardware wallet, whilst on the other may be a power trader constantly opening and closing trades on hundreds of cryptocurrencies daily.
In general, the amount of time and money invested into security should be proportional to the amount of funds held. If you hold meaningful amounts of wealth in cryptocurrencies, the safest place for your funds is in cold storage (coming at the cost of mobility). The bulk of your holdings should be kept in this manner, with the rest distributed into insecure wallets like exchanges or mobile ones – making them readily-accessible for activities like trading or making payments.
The Bottom Line
No storage solution is foolproof. Even the most seemingly secure and elaborate schemes can result in the loss of funds over a careless typo.
Security is not binary – nor is it a single component – but rather an approach that requires proactivity on your part. Individuals serious about the security of their funds must make use of the tools and the literature available to them and understand the various attacks designed to part them from their cryptocurrencies at multiple levels.
On the exchange front, we go to great lengths to harden our systems – all of our funds are kept in multiple-key-controlled cold storage, use a highly-redundant infrastructure via geographical dispersion, and provide our users with the option to use robust two-factor authentication in order to further protect their accounts.