Online wallets, hardware or paper?

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If you’ve been following the exciting world of cryptocurrency, you might be ready to buy your first bitcoin, ethereum, or other digital currency. You have the option to buy and hold your currency through a built-in wallet in an exchange like Coinbase, but that’s not your only option.

You can store your crypto using sophisticated hardware wallets or even a piece of paper. Read on to learn more about where your crypto is stored and the pros and cons of online, hardware, and paper wallets.

How cryptocurrency wallets work

To store cryptocurrency, you need a cryptocurrency wallet. But unlike the big leather wallet your grandpa carried with all his money and cards, a cryptocurrency wallet helps keep track of cryptocurrency owners.

Every bitcoin and every other digital coin ever minted is tracked in a wallet. We don’t know who owns each wallet, but this tracking system is what makes the technology behind cryptocurrencies work. The giant database that tracks the owner of each currency is called a blockchain.

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When you buy bitcoin, crypto or even NFT, the asset is recorded as belonging to your wallet. As long as you have both the public address and the private key, you can remove those assets to another wallet, sell them, or just check to see if they are safe and sound.

Do i even need a cryptocurrency wallet?

Before digging into the details of cryptocurrency wallets, it’s important to understand how they work. Knowing your plans for your cryptocurrency can also influence your storage decision.

Most people in the United States will start buying cryptocurrency through an integrated exchange which will also provide you with a crypto wallet. For example, if you are starting with a cryptocurrency brokerage like eToro or BlockFi, they will create a cryptocurrency wallet for you when you sign up. You might not even realize that you have one wallet or multiple wallets. If you have an exchange account with Bitcoin and Ethereum, for example, you probably already have at least two wallets.

Some exchanges can hold assets for you, the same way a broker holds your stocks. However, this model carries risks. The most infamous example is the fall of Mt. Gox exchange. There, a hacker stole what was then worth nearly half a billion dollars, most of which was impossible to recover.

When you have your own crypto wallet, you act like your own bank. It is the “decentralized” part of decentralized finance. If you’re ready to manage your own wallet outside of an exchange, here are your top options and what you need to know:

Software wallets

Software wallets are a type of digital wallet that is always connected to the web. If you are using any type of app to store your currency outside of your exchange, it is most likely a software wallet.

The great advantage of software wallets is the ease of use. Because they’re always connected, you can easily send and receive without much extra work. They are usually password protected, just like your bank account or investment brokerage account. But that puts a lot of trust in your account creator because they are doing everything right and working in your best interests.

Like Mt. As Gox customers have learned, cryptocurrency assets are not FDIC insured. If someone hacks and steals them, they’re gone for good. This security risk is driving many crypto enthusiasts to seek safer places to store these valuable digital coins.

If you’re new to cryptocurrency or are primarily focused on simplicity, software wallets are probably your best bet. Just make sure to keep your passwords extremely secure. Unlike a regular bank that offers government backed insurance and powerful anti-fraud tools, you’re probably out of luck if something goes wrong with your crypto account.

Hardware wallets

Hardware wallets are the industry standard for security. When your assets are moved to a hardware wallet, you can’t even access your bitcoin without that physical wallet and the associated passwords.

Arguably the two most popular hardware wallets are the Trezor and Ledger wallets. I have a ledger myself and use it to hold the majority of my crypto assets. To send coins or access my private keys, I need to plug or connect my wallet to my phone or computer and enter a security code. This is a step up from a security key that you may need to log in to work or your bank and offer more protection than two-factor tools like Google Authenticator.

The downside here is the hassle of using it. If I want to transfer funds from an external exchange to my hardware wallet and view my address, I need to get it, plug it in, open the companion app, and enter my PIN. But those extra 30 seconds of work are worth it for me to avoid a Mt. Gox redux. If my device is lost or destroyed, I have a backup word set to restore my wallets.

These wallets also come at a cost. You can spend between $ 50 and $ 200 or so, depending on which wallet you choose. If you choose a hardware wallet, you may also need to pay additional network fees to transfer your assets from a preferred exchange.

These require a bit more technicality than software wallets, but give you more security. As long as you keep your unlock codes and passwords safe, there’s nowhere better to store your crypto, IMHO.

Cryptographic term: cold storage

The cold room is a term for wallets that are not connected to the Internet. Both hardware wallets and paper wallets are examples of cold storage. Drop it off at your next dinner party or video call to impress your friends.

Paper wallets

If you want to make it really simple, you don’t need a software or hardware wallet at all. Remember, your wallet address is only two strings of alphanumeric codes. You can print your public and private keys on a piece of paper and use it as a cryptocurrency wallet. I also have one hidden because I wanted to try it.

The big advantage is that it is free and easy to use. Anyone with a printer can make a paper wallet. But like a hardware wallet, if you lose it and have no backup, your cryptocurrency is also lost.

Stories of people searching through dumps for old computers to access their cryptocurrency accounts have likely used this method or a variation. In addition to printing a paper wallet, you can simply save a copy on your computer to store your keys.

There’s no technical reason why you can’t load up a paper wallet and put it in your bank vault for decades. I find it a bit too risky for me for any serious use. It might work as a temporary fix, but I wouldn’t trust it in the long run.

Keep safety in mind when buying and using cryptocurrency

When a new financial product comes along, there’s always a bad guy waiting on the sidelines trying to take advantage of innocent and unsuspecting people. To ensure you have a positive and enjoyable cryptocurrency experience, always keep security in mind when buying, sending, and storing.

In most cases, you will be completely safe with little to worry about. But there is little harm in taking a few extra steps to put your crypto in the most secure wallet possible for your needs.

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