When investing in crypto, there is often a lot to learn about such a dynamic and ever-changing form of wealth creation. Perhaps one of the most fundamental lessons is how best to store your crypto coins or non-fungible tokens (NFTs) to ensure their long-term security.
This is a point that was made abundantly clear during the recent overnight crash of FTX, which was the second largest and fastest growing crypto exchange. The full ramifications of FTX’s insolvency and demise remain unclear, but many investors who had stored cryptocurrency on the exchange stand to lose a lot.
In the aftermath of FTX’s downfall, several experts pointed out the importance of always storing cryptocurrency in a standalone wallet rather than an exchange.
What are crypto wallets?
A crypto wallet is a device designed to store and transfer your cryptocurrency via what is called self-custody. This means that instead of going through a third party, like a bank or financial institution, you can store your crypto on the blockchain and access it using a private key (more on that later).
There are two main types of crypto wallets: hardware and software. Software wallets allow crypto to be securely stored online, while hardware wallets allow cryptocurrency owners to purchase physical hardware similar to a USB flash drive and store coins offline in that device. Once safely stored on the hardware, your crypto wallet can be further secured by locking it in a safe or putting it in a vault.
One of the most important advantages of either form of self-service storage for cryptocurrency is that the assets are protected by private key cryptography, which is similar to the technology used to secure your credit card information when you make an online purchase.
“These keys are what secure your assets,” explained Josh Fraser, co-founder of Origin Protocol, a company that created Origin Dollar, a yield stablecoin, and Origin Story, an NFT platform. “What it looks like in practice is a series of words that essentially generate this private key and secure your assets.”
In addition to hardware and software wallets, there are also so-called hosted or custodian wallets. But to be clear, these are not self-custody wallets. Rather, it is a form of storage hosted by brokerages or online platforms. And depending on the brokerage or platform, this approach can be less secure, as the FTX implosion illustrates. If the brokerage fails or does not manage your coins responsibly, the investment may be lost.
“Deciding on the best wallet to use really depends on the type of person you are. If you have trouble keeping track of passwords, accounts, and other important information, you should consider using a custodial wallet provider, like Coinbase, who can help you find your wallet in case something goes wrong. ‘forgot your password,’ says Tyler Moebius, co. -founder of SmartMedia Technologies, one of the main creators of Web3 and blockchain solutions. “However, if security and privacy are your priority, you might want to choose a self-guarding solution.”
How to Create a Software Wallet
Setting up a wallet is a simple and straightforward process that can be completed in just a few steps.
Step 1: Select a software wallet app you want to use. The first step is to do your research and find a software wallet provider that you prefer. There are many options that offer different levels of security, ease of access, customer service, and price.
It’s also important to keep in mind when searching that some platforms offer the ability to store your wallet on both your desktop and smartphone, while others may not. offer only one of these options.
Step 2: Download the wallet app on your phone or computer. Once you have chosen the software wallet you will use, the next step is to download the wallet app to your phone or computer.
Step 3: Create an account. The good news about many software wallets is that there isn’t much you have to do to create your account. For example, few of them need personal information, according to Coinbase.
Step 4: Transfer assets. Once your wallet is established, you are good to go and can start transferring cryptocurrency to your wallet. This often means transferring crypto from an exchange or brokerage to your software wallet.
“People typically fund their wallets using centralized exchanges like Coinbase, but you can also ask a friend to send you crypto in exchange for cash or another form of payment,” Fraser explains. If you are using a centralized exchange, the best practice is to move assets to a wallet you control as soon as possible.
There is an important caveat about software wallets to keep in mind. You are in charge of maintaining access keys to cryptocurrency assets, which can be problematic if you lose this information.
“If you choose this option, you are solely responsible for keeping the cryptographic keys that secure your assets. The stakes are high, however. If you lose the private keys, your assets are gone forever,” Fraser said.
This means that you probably want to save your private key information in several secure places. But you also need to be careful with those backups, because anyone who accesses your private keys can take whatever assets those keys secure, Fraser adds.
How to create a hardware wallet
Hardware wallets allow cryptocurrency to be stored offline, which can be an added layer of security or convenience for some investors. The hardware is similar to USB drives and as such is a very portable form of storage. The wallet can be taken with you everywhere. Setting up this type of wallet is as easy as a software wallet.
Step 1: Select the hardware you want to use. There are different crypto wallet options available. According to Coinledger, some of the top names in this space include Ledger, Trezor, and Keepkey. Some of the hardware options are more economical, while others are easier to use or offer higher levels of security.
Step 2: Purchase the hardware and install the software required to establish your wallet. After purchasing the hardware wallet that best suits your needs, the next step is usually to install the bundled software, Coinbase explains. Each hardware wallet has its own software that allows you to manage the contents of your hardware wallet.
Step 3: Transfer your cryptocurrency. Once your hardware wallet is established, you can start transferring cryptocurrency from elsewhere, such as an exchange or brokerage.
The take-out sale
Self-service cryptocurrency storage is highly recommended by experts. It allows you to manage your crypto assets yourself and keep them in your possession. But it’s important to do your research and carefully assess whether a hardware, software, or custodial wallet best suits your needs.