Investing in cryptocurrencies like bitcoin has never been more popular. It’s also easier than ever, as a plethora of apps, services, and platforms compete to help you keep your cryptocurrency investments secure and protected. However, for the first-time investor, the choice of options can be bewildering. Investing in this fast-growing market is one thing but having to choose a wallet to keep your virtual currency in can be a headspin too far.
Why security is important
As cryptocurrency investing becomes more popular and profitable, so does hacking and fraud. The value of a digital currency like bitcoin is soaring, but at the end of the day they are just lines of code, and so are both vulnerable and extremely tempting for technologically savvy hackers. The other thing to remember about most cryptocurrencies is that they are completely unregulated. There’s no central bank or other overriding authority that will protect or replace your investments if they are stolen. As the owner of the currency, you are completely responsible for your money, with no safety net.
Choosing a wallet
Cryptocurrency is exchanged, bought and sold using blockchain technology, and the blockchain also keeps track of where all the cryptocurrency in the world is currently kept. To profit from your investments, you need to be a part of this infrastructure, which means that you need to have a wallet where your investment is stored. Check out this handy guide on how to find the best crypto wallet, which also explains exactly why a wallet is necessary.
Essentially there are two types of crypto wallets: one where your investments are kept offline, known as a cold wallet, and one where they are kept online (or at least somewhere permanently connected to the internet), known as a hot wallet. The advantage of a cold wallet is greater security, but at the cost of flexibility and information. A hot wallet is more suited to active traders, but you will need to be more security-conscious to keep your investment protected.
A hybrid solution
For the ordinary investor, experts recommend a combination of both cold and hot digital storage. Use a physical offline wallet to store the bulk of your investment, with a small amount kept in a separate online wallet that you can use for bitcoin trading. This way, your crypto capital enjoys the maximum amount of protection, but you have some ready money offline without having to incur withdrawal fees or waste precious time whenever you want to enter a transaction.
Your cold, offline storage solution may be a desktop or hardware wallet, which is a separate physical device on which your information is stored. Obviously, you don’t want to lose this and so it should be kept in a safe place, ideally a secure locker or safe deposit box. Apart from the physical device getting lost or stolen, the other main risk is of it becoming corrupted, so choose a reputable provider and take due care with every transaction.
Keys and passwords
It’s essential that you are the only person who has access to your digital wallet, and this means making sure that your private key and passwords are secure. These should also be stored offline, with no trace of them detectable in the digital world. Choose strong passwords, change them regularly, and never reuse passwords from other sites or apps.
If you use a mobile app to manage your online wallet, make sure your phone is secure. Use antivirus software with the same diligence you would on a desktop PC. Watch out for malicious apps that can steal, compromise or corrupt your information, and phishing in emails, social media, websites and so on. Because a mobile wallet isn’t on your phone, it should still be safe if your phone is lost or stolen, and this method of storage is one of the most convenient. But it does require a high level of vigilance on your part.
Using an exchange
Letting a cryptocurrency exchange look after your investments on your behalf may seem like the easiest option. After all, they are a big international company and cryptocurrency investment is their business, so they must know what they’re doing, right?
This is true but be aware of just how much trust you are placing in your provider, especially if you let them look after your private keys as well. Hackers are more likely to target large exchanges, and even the most security-conscious could suffer a breach. There is also the possibility that they may go out of business or be taken over by a less capable firm. The main point is that you are surrendering all control and responsibility, so think very hard and choose your provider carefully.