Protecting your assets

Protecting your assets: The security of self-storage

There are various options available for storing cryptocurrency, with third-party custodial storage services being the most popular and common form, especially among new investors. Exchanges are a traditional example of such services, which are hard to ignore due to their rigorous security measures and regular audits. However, with the current state of the cryptocurrency industry, it may not be advisable to store all digital assets in one place. Institutional investors with a substantial amount of cryptocurrency in their portfolios should consider multiple storage options to safeguard their investments.

Hot Storage

Digital asset storage platforms provided by third-party custodians are distinct from merely keeping funds on an exchange since their main purpose is to hold digital assets. Since they rely on an internet connection and may be vulnerable, these types of wallets are commonly referred to as “hot wallets.” If you’ve ever had to transfer cryptocurrency to another person or exchange, it’s likely that you’ve already utilized a hot wallet. Hot wallets come in various forms, but the most common ones are mobile applications and web-based wallets. Certain wallets are intended for a specific coin, such as Ethereum and Solana, which are closely integrated with particular wallets designed for their ecosystem.

Hot wallets are ideal for new investors who want to store larger amounts of cryptocurrency because they have a low learning curve, making them easy to use and helping to familiarize investors with basic crypto storage. With online wallets, investors have control over the management of their assets, and the added bonus is that they are usually free.

Although online wallets are typically heavily secured and commonly used by crypto investors without problems, the main drawback is that they store your crypto on the web, which poses a significant risk of hacking or unauthorized access by malicious third parties. As a result, investors with a substantial amount of assets to manage may want to consider a few alternatives to ensure the safety of their investments.

Dedicated custodial services

For organizations or institutional investors, it may be more suitable to consider using dedicated third-party custodial services. Although this article focuses on the significance of self-storage, dedicated custodial services should not be overlooked. There are various entities that offer crypto custody services, including exchanges, which can be particularly advantageous for high-net-worth individuals, hedge fund managers, and institutions. These services provide an additional level of security, as service level agreements (SLAs) outline the terms for the storage and access of funds. Additionally, strict record-keeping procedures are in place, providing a sense of independence and assurance that your assets are being appropriately managed.

Cold Storage

Cold storage is the opposite of hot storage, which involves storing digital assets offline. This method of storage is considered to be the most secure way of safeguarding cryptocurrency since the assets are only accessible by the owner when offline. Investors with significant holdings often prefer cold storage and sometimes store their assets in safes. Cold storage is also used by many exchanges, including Virgo, as an added layer of security to protect their liquidity.

Physical wallets

Physical wallets, also known as cold storage hardware wallets, are highly recommended for individuals who want to keep their digital investments secure. These are physical devices that come in different sizes and function like portable hard drives, holding digital signatures containing your cryptocurrency. Experienced investors prefer these wallets for their high security and portability. Once you store your crypto and detach the wallet from your computer, it becomes completely isolated and inaccessible to anyone.

Although they are not as user-friendly as web-based wallets or mobile apps, hardware wallets work in much the same way. Once connected to a computer, they are capable of generating an address for sending and receiving cryptocurrency. It is important to note, however, that the possibility of losing a hardware wallet exists. For this reason, most hardware wallets include a recovery phrase that can be used to regain access to your assets in the event that the device is lost.

Paper wallets are an alternative to hardware wallets that may offer even greater security. These wallets can be generated on specific websites, which create private and public keys that store your digital assets. As the name suggests, you can print these keys onto a piece of paper. What sets paper wallets apart is that only the user who possesses the keys can access the assets stored on them. Since they are not connected to a computer or the internet, they offer increased security. Many people store their paper wallets in safes or safety deposit boxes at banks, as there is no interface other than the printed keys themselves, which eliminates the possibility of user error.

Although cold storage is the most secure option, it also entails the greatest responsibility. Similar to how one manages their cash, whether it be in their wallet or hidden away under their mattress, managing digital assets stored in cold storage requires organization and vigilance to keep track of passwords, keys, and recovery phrases for each storage option. Since there is no one else managing the funds, losing the keys or having them destroyed in a natural disaster could result in permanent loss of assets.

With the current landscape of the crypto industry, investing some time into learning how to maximize each self-storage option could be key in protecting your digital valuables during a period of uncertainty and compromised security. Get to know your needs and you can ultimately decide which form of storage is right for your investment.