How do I hold cryptocurrency?

Owning cryptocurrency is unlike other assets. It’s natively digital – so you can’t actually touch it. And while traditional investments are usually kept in a bank or brokerage account, crypto investments are different: to store them, you need a “wallet”.

How does owning crypto actually work?

In owning cryptocurrency, you own an address where coins can be stored on the blockchain – and which have public and private keys. Together, these keys let you access your funds and transact on the blockchain.

• Public key: Your public key is a random string of characters that acts as an incoming-only address that can be freely shared so others know where to send coins or tokens. Think of it as your email address, but anonymous. Giving it to someone doesn’t let them send emails from it, only to it.
• Private key: Your private key is a second string of characters that’s like the password to your email address. You need it to access your crypto – i.e. when sending cryptocurrency out of an address – to authenticate the transaction.

Actual cryptocurrency tokens just represent a balance on the blockchain. What you really own is a private key that allows you to make transactions from a given “address”. In other words, cryptocurrencies are only yours if you hold the private key that allows you to access them – and it’s those keys that are stored in your wallet, or wherever else.

If your keys fall into someone else’s hands, you have a problem. As you’ll remember from the first guide, two people with a private key to the same wallet have an equal claim to those funds. And as cryptos are decentralized, there’s no authority to resolve disputes or enforce ownership.

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What is online storage and how does it work?

When it comes to storing your keys, you have two options: store them with a third-party platform (like a crypto exchange), or store them yourself (self-custody).

The most straightforward way to hold crypto is via a cryptocurrency exchange, meaning they’re responsible for keeping it safe.

Advantages of online storage include:

• You can still access your crypto if you forget your password – though you might have to jump through a few authentication hurdles to do it
• Convenience for traders because they can access their crypto and trade there and then.
• Top-tier crypto exchanges have excellent security nowadays

Disadvantages of online storage include:

• Security: it leaves you vulnerable to hacking
• Since you don’t have a private key to access your crypto, you don’t technically “own” it
• You often can’t plug into decentralized finance (DeFi) and NFT applications on the blockchain

What is a digital wallet and how does it work?

Enter digital wallets. You can open one with an exchange, or by downloading a wallet via a desktop or mobile app. Digital wallets let you hold on to those private keys yourself instead of relying on a third party – and allow you to store, send, and receive your cryptocurrency. Each provider will have slightly different processes – but generally speaking, you’ll be responsible for keeping that information safe somewhere on your computer or smartphone.

Advantages of digital wallets include:

• Fast transactions
• Ease of use on the go
• Control of private keys (if you’re not using a wallet hosted by an exchange)

Disadvantages of digital wallets include:

• Online security risks like computer or smartphone hacking and viruses
• Lack of direct control over your crypto (if a third party – like an exchange – hosts your wallet)
• Potential loss of crypto assets if your device is lost or damaged

What is a paper wallet and how does it work?

There are a few ways to securely store your keys yourself. At the most old-school end of the spectrum, there are paper wallets, which you can set up using a website like bitaddress.org.

Advantages of paper wallets include:

• Free to set up
• not connected to the internet – known as “cold storage” – so they’re highly secure, and only you have access to your wallet

Disadvantages of paper wallets include:

• You need a different paper wallet for every individual blockchain where you own coins and tokens (e.g. if you wanted to store ether or other Ethereum-based tokens, you’d have to create another wallet)
• Securely storing paper has no safety net if you lose it or it gets stolen.

What is a hardware wallet and how does it work?

Hardware wallets are essentially portable USB drives that store your private keys. Using a hardware wallet is the most secure method for storing digital assets. A hardware wallet keeps your private keys offline and inaccessible to digital threats.

Hardware wallets work by generating a set of private keys, which you ought to keep safely offline. The wallet itself is secured by a PIN – and the device will erase after several failed access attempts, preventing physical theft. What’s more, hardware wallets let you physically sign off on transactions, ensuring a further layer of security on each action you make.

Some advantages of hardware wallets include:

• Security – considered the safest option by experts
• Long-term storage of large crypto balances from multiple blockchains
• Can’t be digitally hacked if kept offline
• Direct control over your crypto – including when integrating with non-custodial wallets

Some disadvantages of hardware wallets include:

• Cost – hardware wallets are the most expensive (they usually cost between $100 and $300)
• Potentially difficult for beginners
• Less convenient for day-to-day transactions

What are online non-custodial wallets and how do they work?

Online non-custodial wallets, like MetaMask and Coinbase Wallet, are another way to store your own keys. Unlike exchanges, paper wallets, and some hardware wallets, these link straight into the DeFi and NFT ecosystems on the blockchain.

These wallets come in the form of desktop extensions or user-friendly mobile apps. Mobile apps are usually the most secure, as phones normally have better virus protection than old desktops and laptops. Remember, because they’re online, they’re only as secure as the device you’re using to access your funds.

When you first set up an online non-custodial wallet, the wallet provider usually asks you to come up with a seed phrase and then create a password on top of that. Whatever you do, make sure you don’t lose those, as it can be a long process trying to regain access to your funds – if you even manage to at all.

What about wallets that don’t have keys?

Institutional investors – like hedge funds and family offices – outsource crypto custody to institutional-grade providers to keep client assets secure. This also helps institutions meet their regulatory obligations: the custodians are independent of the investment manager, who can’t access the crypto without going through the custodian first.

Institutional custodians use their own patented methods for securing client crypto. Some of them, like Fireblocks and Copper, for example, use multi-party computation (a.k.a “MPC”) to create extra layers of security. Without getting too technical, this involves splitting private keys into several independent “shares,” which can be more secure than having a private key exist in one place.

Of course, these products are aimed at institutional investors, and they’ve got tiered fee structures to go with that – the more assets you hold with a custodian, the more cost-effective it becomes. So this option would only make sense if you’re stacking serious amounts of crypto.

Crypto will forever be enticing for hackers to steal. But following strong storage and security practices will reduce your chances of an attack. More on how to do that in part three of this series…

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