The rising demand for digital currencies among users worldwide is evident. People buy coins, carry out various transactions, and earn from them. You can learn about the different ways to buy digital currencies from the article "How to buy cryptocurrency."
In this article, we will discuss how to store digital currency to avoid criminal attempts on it. In reality, there are many ways to store cryptocurrency, so every user can choose the one that best suits their needs.
Where to buy cryptocurrency
Before we discuss where to store cryptocurrency, it’s essential to understand where and how it can be purchased. Currently, due to the widespread adoption of digital currencies, there are many opportunities and platforms available for buying them.
There are several ways to purchase crypto:
- Exchangers are specialized platforms where you can buy, sell, and exchange fiat money for digital currencies or one cryptocurrency for another. There are numerous such exchangers, and the exchange rates may vary, allowing you to choose the most suitable one.
2. Cryptocurrency exchanges are platforms that not only enable buy/sell operations with crypto for fiat and digital money but also facilitate trading and storage of digital coins. Each exchange has its own conditions, so it's important to carefully review them before use. There are two types of crypto exchanges:
- Centralized Exchanges (CEX) are platforms controlled by an organization that acts as an intermediary for all operations on the exchange. A key feature is that all user funds are stored on the platform itself.
- Decentralized Exchanges (DEX) are platforms based on smart contracts and blockchain technology. Transactions are conducted without intermediaries. Users’ funds and personal data are not stored on these platforms.
- 3. P2P Platforms are facilities for conducting transactions with cryptocurrency without intermediaries. Sellers post their offers on these sites and buyers can choose the offer that best suits their price and other conditions. However, such platforms are not regulated, and there is a risk of encountering fraudsters.
- 4. Crypto ATMs are devices similar to ATMs where you can buy digital currency offline. You can purchase crypto with either a card or cash. However, such ATMs are not available in all countries, and their fees are generally higher than other services.
Each of the methods mentioned above has its advantages and disadvantages, so users can choose the one that best meets their needs. After acquiring crypto, the question of its storage arises, and there are also different options available depending on the user's needs.
What is cryptocurrency used for
The question of storing digital currency is inseparably linked with how and for what purpose it will be used. Let's take a closer look at the various purposes for which crypto can be acquired and how it can be used:
- Long-term investments are one of the most common ways to use digital coins. This involves purchasing and holding crypto for a long period until its price rises and it brings the desired profit.
- Cryptocurrency deposits mean placing digital money on specialized platforms to earn interest. This is similar to a bank deposit, where the bank pays a predetermined interest rate for using the depositor's funds. In the crypto world, this is implemented through staking and lending:
- Staking is placing digital coins in special accounts to support the platform's operations in exchange for a reward which is paid in the platform's native currency.
- Lending is providing funds as a loan to a platform or directly to other users for interest, similar to a bank loan.
3. Trading means engaging in speculative transactions based on changes in the value of digital currency. The duration of such transactions usually ranges from a few minutes to several hours, so the currency must be readily accessible.
4. Cryptocurrency transfers, including international transfers, are used in cases where bank transfers are not possible due to sanctions or other restrictions. Additionally, such transfers can be made anonymously, which is another advantage.
5. Payment for goods and services is available in some online stores and marketplaces that accept digital money. This option is convenient for users who, for example, receive their salary in cryptocurrency.
6. Salary payments are used when the employer and employees are in different countries. This avoids bank and other fees, with the money being sent directly to the employee's cryptocurrency wallet.
As digital currency is bought for specific goals, different storage methods are more suitable for different cases. Let's explore them in more detail in the following sections.
Where to store cryptocurrency
As we have already established, the goals for using digital currencies can vary greatly. Depending on these goals, different storage options for cryptocurrency are required. There are several types of wallets that we will consider in this and subsequent sections.
There are two major groups into which all storage methods are commonly divided. The first large group is "hot" wallets, which operate through an Internet connection. Therefore, access to the assets held in them can only be obtained with an Internet connection.
The second group is "cold" wallets, which do not imply an Internet connection. These devices operate offline, thereby protecting crypto from criminal attacks.
To compare the key characteristics of these two major groups, let's examine the following table:
| Characteristic | Hot wallet | Cold wallet |
| Internet connection | required | not required |
| Access to assets | easy, fast | complicated |
| Security | low | high |
| Recovery of data | simple | complicated |
By understanding these distinctions, users can choose the most appropriate storage method based on their specific needs and goals for using digital currency.
As you can see, each type of storage has its strengths and weaknesses. "Hot" wallets are more suitable for those who do not store large amounts of crypto assets and need them for daily transactions, such as trading, payments, or transactions.
In contrast, "cold" wallets are better suited for those who need to store a large amount of digital coins for a long time and do not need constant access to them. For example, they can be used for long-term investments.
It's important to remember that if you lose the password for a "hot" wallet, it is relatively easy to recover. Additionally, many of these wallets are integrated with crypto exchanges, which can reduce or eliminate transaction fees. In the case of losing the password to a "cold" wallet, it is almost impossible to recover it.
How wallets work
Although digital money exists only in the virtual space when it comes to where to store cryptocurrency, not only electronic devices can be used. This is due to certain features of receiving and storing crypto, which we will discuss further.
Digital currencies are inseparable from the blockchain and exist only within it, but access to your coins is provided to the user through keys that can be stored in a special wallet. There are two keys for accessing data: a public key and a private key.
- The public key is the address of the wallet. It is not confidential information, can be publicly available, and other users can send digital money to the wallet owner using this address.
- The private key is the password for the wallet. It is strictly confidential information accessible only to its owner. It is used to sign transactions and gain access to the user's crypto assets. Losing this key can lead to losing access to your digital assets.
However, there are some methods to recover access to your data. One of the most common is a seed phrase, which consists of a sequence of words and serves as a master key. With this phrase, new private keys and addresses can be generated.
When performing a transaction on the blockchain to transfer digital coins from one user to another, the assets themselves do not physically move anywhere. A record of this transaction is made on the blockchain, and the coins are transferred from one user's address to another.
Besides, it is important to pay attention to which currencies or standards a particular wallet supports. If the address is correctly specified but the network standard (e.g., ERC-20) is incorrectly chosen, the coins will be sent "into the void," and it will be impossible to get them back, as blockchain transactions are irreversible.
Types of wallets
We've already determined that storage methods can be divided into "hot" and "cold" wallets. However, each of these types is further subdivided into several kinds of wallets. So, when answering the question "Where to store cryptocurrency?" you can choose from the following types:
- Hardware wallets are devices similar to flash drives that store the user's private keys. They do not need Internet access, so to perform operations, they have to be connected to a computer or another device. These wallets are considered the most secure because the data storage device is protected from physical impacts. However, it should be understood that in the event of serious damage, data may be lost, and it will be nearly impossible to recover them.
- Software wallets are special applications for smartphones or computers. Such programs provide users with access to their crypto assets through a special interface. These wallets are the most convenient and straightforward in terms of usage and access to assets. However, from a security standpoint, they are considered very vulnerable and are not recommended for long-term storage of digital coins.
- Paper wallets are a type of "cold" wallet, represented by a piece of paper on which the user's public and private keys are typed. This method of storing information may seem old-fashioned, but it is quite reliable. To get the keys, you need to use a special generator that creates keys for the user and encrypts them in the form of a QR code. After that, such a wallet needs to be printed or the keys can be written down manually. To ensure data safety, the main thing is not to lose or damage this paper.
Another classification of wallets
In addition to all the aforementioned types of storage, there is another classification of crypto wallets. Therefore, when deciding where to store cryptocurrency, you can choose between custodial and non-custodial wallets. What are they, and how do they differ from each other?
The custodial wallet is a specialized service that provides storage services for users' private keys. In other words, the owner of such a wallet can perform any operations with their coins, but they do not have access to their private key.
These wallets are often used by cryptocurrency exchanges and other organizations in the DeFi sector. The storage is fully managed by these companies, which are responsible for executing transactions and ensuring the safety of clients' private data.
Clients register for such a service, and it often requires verification, which is the process of identity confirmation. After that, a login and password are created, which are used to access the personal account, through which the user can manage their digital assets.
The client then gives instructions for performing operations with their currency, and the platform executes them. These platforms receive commissions from users for performing various operations. Additionally, access to such wallets can be easily restored with a few simple steps.
Non-custodial wallet is also provided to the user by a third-party provider. However, unlike a custodial wallet, it is fully controlled by its owner. The user is also responsible for the security of the crypto assets in this wallet. The owner of the storage independently saves their keys and enters them for each operation. Because of this, such wallets can be more complex to use than custodial ones. This group includes hardware and software wallets, which we have already discussed earlier.
How to choose a crypto wallet
We have already established that there is a wide variety of wallets for digital currencies, each with its own pros and cons. So, how do you choose where to store your cryptocurrency? Let's discuss the key aspects to consider first.
1. Security. The first thing to consider is security. From this perspective, the most reliable options are "cold" storage solutions such as hardware or paper wallets. They are not connected to the internet, making it harder for hackers to access them.
2. Frequency of use. If you buy crypto for earnings, payments, or transactions, "hot" wallets, such as non-custodial wallets, are more suitable. These wallets allow you to quickly access your assets and perform transactions.
3. Support for different blockchains. Some wallets are designed to store only one currency, while others are multi-currency and can store various digital coins simultaneously. If a wallet supports only one chain, you will need a separate service for each currency.
4. Reputation. This is another important parameter. Research and review the service providers to avoid fraudsters or malicious actors who aim to steal users' coins.
5. Access and control. Some storage solutions, like custodial wallets, do not give owners direct access to their private keys but allow them to perform operations with their assets. In contrast, non-custodial wallets place the responsibility for data and password security on the user.
6. Backup options. Backup capabilities make it easier to manage your passwords and store them in the cloud. This is especially relevant if you have multiple wallets for different cryptocurrencies or use them for various purposes (holding, trading, payments, etc.).
How to protect your wallet
Regardless of the storage method chosen, it's crucial to determine not only where to store cryptocurrency but also how to protect your assets from criminal attempts. Here are some additional protection measures for wallets:
- Encrypting the wallet involves setting a strong password which is necessary for accessing any type of wallet, whether "hot" or "cold."
- Avoid public Wi-Fi. Avoid logging into wallets through public Wi-Fi networks. Data can be stolen by hackers, granting them access to your storage. It is better to use a secure home network.
- Multisignature requires confirmation of a transaction by multiple parties (e.g., family members or partners) or on multiple devices owned by the same user.
- Two-factor authentication requires an additional variable password for transactions, which can be obtained through special apps that change passwords every few seconds, preventing cyber -attacks.
- Backup allows password and data recovery in case of loss, such as passwords recorded on paper. Regular backups keep data up-to-date.
- Storing crypto on multiple wallets. Large amounts are better kept in secure offline wallets, while smaller amounts can be stored in online wallets for transactions.
- Regular software updates. "Hot" wallets often update their security systems, so updating apps or programs in time ensures the best protection.
- Verifying addresses. Ensure the address is correct before sending crypto. Blockchain transactions are irreversible, so sending to the wrong address means you cannot recover or cancel the transaction.
Conclusion
In this article, we discussed key questions regarding the purchase and use of digital currencies: where to buy, how to use, and where to store cryptocurrency. These questions are crucial for preserving and growing your crypto assets.
There is a significant variety of crypto wallets for storing digital coins. When choosing a storage method, consider different parameters such as security, usage goals, and others.
Wallets can be "cold" or "hot," with the primary difference being internet access: the former does not have it, while the latter does. Consequently, "cold" wallets are more secure and suitable for long-term storage, while "hot" wallets are better for daily use.
Among "cold" wallets, there are hardware and paper wallets. Hardware wallets are standalone devices similar to USB drives that store the user's private keys. Paper wallets contain keys encrypted as a code or written manually.
"Hot" wallets include software wallets—applications that allow users to access their crypto assets. They can be used for trading and quick transfers or payments. It is not recommended to keep large amounts in such wallets due to higher vulnerability to hacking.
It is important to note that during any transaction, digital currencies do not physically move from one storage to another; they remain in the blockchain. A new record is created about the transfer, and the coins change the sender's address (public key) to the recipient's address.
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