As a beginner embarking on cryptocurrency investments, one of the first factors you need to think about is how to safely purchase and keep cryptocurrency. It’s crucial to understand how and where to store your crypto before hitting the “buy” button to prevent your investment journey from facing an early setback. Keep in mind that cryptocurrencies cannot be stored in a conventional bank account; they must be kept in a crypto wallet on recognized crypto exchanges/apps or specialized hardware. You should select a storage method that offers both security and accessibility.
Mistakes can lead to serious consequences, such as losing your entire cryptocurrency holdings. In 2021, Stefan Thomas, a programmer and Bitcoin supporter, lost 7,002 Bitcoins (BTC)—now valued at approximately $203 million—because he forgot his wallet password. To help you steer clear of a similar misfortune, this guide to crypto storage will examine various storage options and the considerations to take into account when selecting a choice that aligns with your desired safety, security, and accessibility preferences.
To store cryptocurrency, you need a wallet. A crypto wallet is a device or software that holds your crypto assets, private keys, and different wallet addresses (public keys) all in one location.
Required Steps for Storing Cryptocurrency
Once you purchase a crypto asset, you’ll need a secure place to keep it. Many crypto investors choose to leave their crypto on the exchange where they acquired the asset. These exchanges typically offer complimentary hot wallets that require minimal or no setup, but you’ll need an account with the exchange to access these wallets.
Steps for Storing Cryptocurrency on an Exchange
- Step 1: Research multiple crypto exchanges. You want to select an exchange that supports a broad range of cryptocurrencies, has an excellent user experience (UX), and operates in your country.
- Step 2: Create an account with your chosen exchange. Opening an account usually takes about five minutes. However, you’ll need to meet the exchange’s know-your-customer (KYC) criteria.
- Step 3: Fulfill the KYC requirements. Provide personal details such as an email address, phone number, and legal name. You might be required to submit a utility bill, government-issued identification, or other documentation to confirm your identity.
- Step 4: Deposit your cryptocurrency. After setting up your wallet, it’s safe to store your crypto. Depositing crypto necessitates a wallet address, which is often found on your preferred crypto’s transaction page. To obtain the wallet address you need, just look for a string of 40 alphanumeric characters displayed on the screen or start a deposit transaction, and it should show up.
Steps for Storing Cryptocurrency in Cold Storage
- Step 1: Purchase a cold storage device. A portable device with Bluetooth connectivity is recommended.
- Step 2: Install the appropriate software on your PC. Most cold wallets come in the form of USB drives or small devices and might need to connect to your phone directly.
- Step 3: Keep your recovery (seed) phrase safe. Ensure you remember this phrase consistently. Forgetting it may lead your cold wallet to format itself after several unsuccessful attempts, resulting in the loss of all your crypto. Recovery phrases are vital and MUST be kept secure. Only your seed phrase can rescue you if you forget your pin or password.
- Step 4: Generate a new wallet address. For every new cryptocurrency you intend to store, this address will be used to transfer crypto from your other wallet to your cold wallet.
- Step 5: Transfer your cryptocurrency to the designated address on your cold storage wallet. Be certain to verify that you’re sending your crypto to the correct address. Sending crypto to the wrong address, such as Bitcoin to an Ethereum address, could lead to the irreversible loss of that asset.
Steps to Storing Cryptocurrency in a Hot Wallet
- Step 1: Establish your desired wallet. Creating an account typically takes about 10 to 15 minutes, and most wallets will require a stable internet connection during the setup process.
- Step 2: Complete KYC. Knowing Your Customer (KYC) is a requirement for various hot wallets, though some may let you bypass this step and complete it later.
- Step 3: Verify that your chosen hot wallet is set up. Certain wallets don’t need extra steps to activate a hot wallet for specific cryptocurrencies, while others require you to manually add the cryptocurrency you want to store or use. To do this, you should look for and select “add.”
- Step 4: Transfer your crypto. You can now provide your wallet address to anyone who wishes to send you cryptocurrency.
Steps to Storing Cryptocurrency in a Paper Wallet
- Step 1: Use a computer that you are confident is free of any malware. If possible, consider using a new personal computer for this purpose. This is important because creating paper wallet credentials on an infected device compromises your wallet’s safety for cryptocurrency.
- Step 2: Go to a paper wallet generator website. These free resources can quickly generate the necessary credentials, such as public and private keys, in just seconds.
- Step 3: Create an address. Choose how many addresses you want to produce and click “generate.” Some platforms can create as many as 10,000 addresses simultaneously.
- Step 4: Print your paper wallet. To keep your cryptocurrency offline, a common approach is to print the wallet and fold it such that the crypto address is visible on the outside while the private key is concealed inside. This design makes it harder for others to easily see your private key.
- Step 5: Transfer cryptocurrency to your paper wallet. After sending your funds, store the wallet in a safe place, protected from damaging factors like humidity and heat. Since cryptocurrency is virtual, you can send it to any wallet type—be it paper, digital, or physical—as long as you have the relevant address.
What You Need to Open a Cryptocurrency Account
Creating a cryptocurrency account is straightforward if you have the required information. Some wallets even permit the creation of multiple user accounts within the same wallet. Keep in mind that you will need to submit the necessary KYC information; these details assist exchanges and wallets in combating money laundering and other financial illicit activities.
Research the Cryptocurrency Account
Conducting background checks before registering with an exchange or wallet is essential. Such checks can help you avoid considerable hassle and protect you from falling prey to scammers impersonating reputable businesses. Start by examining the company’s website. Here are several questions to consider:
- Does the website seem dubious?
- Does the URL align with the company’s name?
- Who operates the exchange?
- While many aspects of the crypto world are anonymous, the owners of wallets or companies typically are not. If you find the website trustworthy, proceed to social media to verify the company’s official accounts. Also, watch for red flags and pay attention to the opinions of others about the company. Are there many complaints about inefficiency?
Sign Up
To utilize a cryptocurrency wallet or exchange for the first time, you must register by providing specific details and documents that give the exchange background information about you. Below is the information that most exchanges typically ask for:
- Full name
- Birth date
- Email address
- Telephone number
- Residential address
- Social Security number
- Driver’s license or passport
Understand the Basics
Since cryptocurrency functions as money, it must be securely protected from hackers, scammers, and other malicious individuals. If these bad actors gain access to your crypto, they can transfer it to another wallet or sell it for cash, leaving you with nothing. When selecting a crypto wallet storage solution, opt for one with robust security measures that make it challenging for anyone to breach your wallet and steal your assets.
There are several secure wallet options you can consider, including crypto exchanges, cold storage wallets, paper wallets, and hot crypto wallets. If you need quicker access to your cryptocurrency, choose a crypto exchange or hot crypto wallet. Alternatively, if your priority is security and offline storage of your cryptocurrency, cold storage or paper wallets may be the better choice.
Cryptocurrency Exchange
A crypto exchange is a platform that enables you to access cryptocurrencies and perform crypto-related transactions. Most wallets can be downloaded for free, but they usually come with a transaction fee when sending or selling cryptocurrency. Popular examples of cryptocurrency exchanges include Coinbase, Binance, and Kraken.
Cold Storage Wallet
A cold storage wallet is a type of wallet that is not connected to the internet. With these wallets, your cryptocurrency is shielded from hackers, making them ideal for holding significant amounts of cryptocurrency. Many users prefer Trezor and Ledger for this purpose.
Hot Crypto Wallet
Conversely, a hot crypto wallet is linked to the internet. This implies that you require an internet connection to access your funds. Although these wallets are more vulnerable to hacks, they facilitate easier access to your cryptocurrency for frequent transactions. There are many hot crypto wallets available today, but Guarda and Mycelium are highly recommended based on their security features.
Paper Wallets
Despite their decline in popularity, paper wallets can still be effective for storing cryptocurrencies. A typical paper wallet includes your private keys and address printed onto it. Paper wallets offer relative safety; however, if the paper is lost or stolen, a thief could easily access your keys and deplete your crypto, or you might lose your funds permanently.
Know the Risks
No method of storing cryptocurrency is entirely secure, even with various protective measures.
Risks of Storing Cryptocurrency in an Exchange
Keeping your cryptocurrency on an exchange is often seen as the simplest way to manage it, yet it can also lead to rapid loss due to hacking. If the exchange suffers a security breach, you could permanently lose your cryptocurrency, even when your passwords and private keys are secure.
Risks of a Cold Storage Wallet
Generally, cold storage is the safest method to store your crypto away from online threats and security vulnerabilities. However, it is still possible to lose access to your crypto, particularly if your device is lost or stolen. Additionally, water or fire damage could permanently destroy your crypto, especially if you haven’t backed up your seed phrase.
Risks of a Hot Crypto Wallet
Hot crypto wallets share similar risks to storing crypto on exchanges. Nevertheless, they are usually somewhat safer. If your device is compromised or you unintentionally download malware, your wallet could be completely emptied.
Risks of a Paper Wallet
Your paper wallet is highly susceptible to physical damage, deterioration, or theft. Although these wallets are relatively inexpensive, they are easy targets for thieves. An attacker only needs to obtain the paper to steal your assets. Even if multiple copies of the paper wallet exist, it offers little protection since your private keys are present on any copy you create or save digitally.
Factors to Consider When Opening a Cryptocurrency Account
Security: Assess an exchange’s security features prior to creating an account. It is advisable to choose one that provides two-factor authentication or another security enhancement alongside the standard password feature.
Fees: Many exchanges impose a small fee for buying, selling, or sending cryptocurrencies. If frequent trading is your intention, opting for an exchange with relatively low fees can help you save on transaction costs.
Number and Quality of Supported Cryptocurrencies for Trading Options: If your aim is to trade various crypto assets, selecting an exchange that supports more than just Bitcoin and Ethereum (ETH) will be essential.
Storage and Custody: If you’re not particularly skilled at managing passwords and passphrases, using a custodial storage option like a hot crypto wallet can be beneficial. These solutions store your crypto for you and can assist in recovering your password if it’s forgotten.
Customer Service: Although many exchanges provide a customer support center or an email contact for issues, it is preferable to select one that offers a live chat feature. These options tend to have quicker response times and can be more efficient in resolving inquiries.
What Are the Different Types of Cryptocurrency Exchanges?
Centralized
A centralized exchange is a platform for trading cryptocurrency where transactions are facilitated by an intermediary (the exchange). These exchanges assist with crypto transactions for a fee; however, your crypto may be utilized by the exchange for its own purposes, as seen in the case of FTX. To create an account on a centralized exchange online, you typically need a password or PIN. When using apps, you may access your account with minimal or no security features.
Decentralized
Decentralized exchanges (DEXs) are designed to remove the need for a central authority. Instead, they operate on smart contracts and do not store your crypto on your behalf. With DEXs, the exchange does not have access to your crypto, preventing it from misusing your assets. To use these exchanges, you need to store your crypto in an external wallet and connect it to the decentralized exchange (DEX) when conducting transactions. After completing your trades, it’s important to disconnect your wallet from the platform for security purposes. Although decentralized exchanges may be more challenging to navigate, they offer greater privacy and can facilitate anonymous transactions, as they do not require KYC.
Hybrids
A hybrid exchange merges the characteristics of both centralized and decentralized exchanges by enabling high-volume transactions. However, some hybrid exchanges may require KYC for larger trades. With these exchanges, you can expect quicker transactions since users are matched with each other using a decentralized database.