You’ve decided to take the plunge and invest in crypto. But where should you keep it?
Meet the digital wallet. Or ‘e-wallet’ if you prefer. This is either an electronic device or online service which allows you to make electronic transactions.
Crucially, it’s encrypted. This means that data - in this case, your currency - can only be unlocked with the correct electronic key.
Your private key is generated on creation of the wallet, and you need to keep it safe. If your private key isn’t kept securely, it’s an invitation for would-be cybercriminals to rinse your account. One important difference between a digital wallet and a bank account is that, in the case of the former, you’re responsible for the security of the funds. If someone obtains your private key and empties your wallet, there’s usually no redress.
Physical wallets vs wallet service providers
When deciding where to store your currency, one consideration is whether you’ll store it physically yourself, or use a wallet service provider (WSP).
What you plump for will be largely down to your needs. Having a software wallet on your desktop might be appealing for those who like to have control over their coins, and keep everything on their laptop. This could be risky though, as a lot of people’s laptops are connected to the internet for a large proportion of the time, and are at risk of being infected with malware.
Many agree that having your own physical wallet (usually like a USB pen) is more secure, as your currency will be less of a target for hackers, and seldom connected to a network.
However, by using your own equipment, you run the risk that either you might lose it, or that the hardware may become corrupt. Neither would be good news if you hope to recover your currency.
The alternative is using a WSP. Companies such as BitGo can look after your currency using secure servers, and you access your currency via an online dashboard.
Again, there are pros and cons to this approach. One of the cons is the perceived risk of hacking. However, this can be mitigated by currency being stored offline (more on that in a moment). But a major pro is that a reputable WSP is likely to back up your data. This means that - unlike in a situation where you lose a physical wallet or it becomes corrupt - your currency should still be accessible in the aftermath of something going wrong.
In addition, BitGo in particular now offers cover for its wallets, provided by… Well, us! So that extra level of security can provide valuable peace of mind for investors in cryptocurrency.
Cold vs hot storage
Digital currency can either be stored offline (cold storage) or connected to a network (hot storage). So, for example, if you keep your currency on a USB stick that’s almost never plugged in, that’s cold storage. Where as if you have instant access to currency that’s stored with an online wallet provider, it’s likely to be hot storage.
We say ‘likely to’, because WSPs tend to offer cold storage as well. Whether you opt for cold or hot storage will largely depend on the frequency with which you’d like to trade. If you’re viewing your digital currency as an investment you’d like to sit on, then cold storage is the one. As it’s not connected to a network, it’s necessarily more secure (although there have been some instances of theft from cold storage). However, it’s likely to take longer to access it.
If you want to trade frequently, then you’re in hot storage territory. Although currency in hot storage is less secure, it’s readily available if - for example - you want to suddenly sell in one currency to reinvest in another. This is likely to appeal to those who have more of a hands-on approach to their investments.
Again, by opting for Coincover protection with your BitGo wallet, you can add a layer of security to your investments - whether they’re hot or cold!
Want an expert view someone who’s road-tested various different types of storage? Read our co-founder’s hot wallets vs hardware wallets blog.