Crypto 101: Wallet Basics
When entering the Crypto space it can sometimes be more than a little confusing when trying to determine the best place to store your new found investments. There are multitude of options and none of them seem very cut and dry. What follows is a basic outline of the options available, the pros and cons of each, and my personal preference.
Option 1: Hot Storage
The first and easiest method of storing your Crypto is known as "Hot Storage" which ultimately means that your wallet is online all the time and that much more susceptible to hacks. Some of these options include keeping your funds on an exchange which is especially risky with larger sums of currency. Exchanges can be hacked fairly easy with enough computing power and money. A typical attack is known as a "51% Attack, or a "Double-Spend Attack" and can allow hackers to gain up to millions of dollars in a very short time period. The plus side to keeping your funds on an exchange is if you are actively trade a lot and need to be able to move funds around quickly, it aides this process well.
There are also Online Wallets which can be convenient when there are not a lot of other options available. For instance is you don't want to store on an exchange and your not into Cold storage, there are usually a host of online wallets that will support your given Crypto of choice. It should be noted that once again these are always online and you are ultimately holding your breath that the website, app, or exchange does not suddenly close up shop, get hacked, or stops all transactions due to unexpected errors. For a better explanation I detailed my own experience with this in a post I wrote called, "Learn From My Mistakes: Online Wallets".
Option 2: Cold Storage
If you've been around for a little bit I'm sure that you have probably heard that Cold Storage is the better of all options, and I tend to agree. Cold Storage is a means of keeping your Crypto offline completely and the only way it can be accessed is through "Private Keys" that are created when initially setting up the wallet to begin with. There are 3 major forms of Cold Wallets. Those are Desktop Wallets, Paper Wallets, and Hardware Wallets. There are distinct advantages and disadvantages to all of these.
Desktop Wallets are exactly what they sound like. It is a program you download on your computer to store your funds. The problem with this method in my opinion is that you need a computer that is always offline, and that never has the possibility of getting stolen. The second you put your private keys into a desktop wallet that is online you will need to create a new ones. Once it has been used online its as good as compromised. To complicate matters further if your computer gets stolen so does your money. They are still much safer than Hot Wallets, but in my opinion definitely have their drawbacks.
Paper Wallets are also exactly what they sound like. They are a set of private keys printed on a piece of paper that can be used to access your funds at any time of your choosing. If this option is chosen it should be noted that multiple copies are usually made and stored in secure places in case the original is lost. The problem with this is if your paper wallet is lost or damaged your funds are gone forever. I like to think this method is a little more secure than desktop wallets, but it should be noted that once you enter your private key online they are also as good as corrupted and a new paper wallet should be made to replace the old one.
Hardware Wallets are physical device that is used to store your private keys, and only sign transactions within the device itself so that keys are never exposed online in any way, shape, or form. These devices usually come with a recovery seed upon setup and can be used to recover your device if ever lost or stolen. It should be noted though that recovery seeds are just as vulnerable as paper wallets. That is to say... If you lose your device and seed it will be gone forever. I find personally that finding a secure place with another device just for backup works quite well. This way if my device is ever lost or stolen I will have plenty of time to restore my wallet onto the new device before the original is compromised. I personally use a well known hardware wallet and love its ease of use and the peace of mind that I have knowing none of my Crypto is ever sitting online.
Whether you choose Hot or Cold storage it is clear that there are risks to every method. What works for me is not what necessarily works for you. I hope this very basic outline will serve as starting point to those getting into the space. Bottom line is always to due your own research and make informed decisions. After all its your money, your future, and your peace of mind
-Happy Trading
Thanks for the post. I have been considering getting a Trezor for that last couple of months myself...right now I use hot storage like coinpot and coinbase mostly but I do not like the Idea of having to log into their sites everyday just to make sure my crypto is still there. Again Thanks for the post.
Glad you enjoyed I can vouch for Trezor. Big fan!
Cryptospace isn't confusing at all.
If you jump in the pond knowing atleast the basics.
Those not willing to learn basics before jumping any (not just crypto) pond will always drown.
Confusing to some, and not confusing to others. This is meant to be brief clarification for beginners so they can do more research.
To listen to the audio version of this article click on the play image.
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Brief explaination... thx
Meant to be brief as stated in the article. Just an introduction for those who don't know the basic differences between wallet options. A more technical breakdown could be a possibility in future posts if there is enough demand. Thanks.