When investing in crypto, there is often much to learn from such a dynamic and ever-evolving form of wealth building. Perhaps one of the most fundamental lessons is how best to store your cryptocurrencies or NFTs (non-fungible tokens) to ensure their long-term security.
This is a point that was made abundantly clear amid the recent overnight crash of FTX. FTX was the second largest and fastest growing crypto exchange. The consequences of FTX’s default and death are still unclear, but many investors who had stored cryptocurrencies on the exchange stand to lose a lot.
Since the fall of FTX, more than a few experts have emphasized the importance of keeping cryptocurrencies in your wallet instead of exchanging them.
What are crypto wallets?
A crypto wallet is a device designed to store and transfer your cryptocurrency through so-called self-storage. 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 with your 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 devices like a USB drive and store coins offline on that device. Once your crypto wallet is safely stored on the hardware, it can be further protected by locking it in a safe or placing it in a safety deposit box.
One of the main benefits of either form of self-storage cryptocurrency is that the funds are protected by private key encryption, similar to the technology used to protect your credit card information when you shop online.
“These keys protect your assets,” explained Josh Fraser, founder of Origin Protocol. The company created Origin Dollar, a yield-bearing stablecoin, and Origin Story, an NFT platform. “In practice, there seems to be a set of words that essentially create this private key and protect your assets.”
In addition to hardware and software wallets, there are also so-called hosted or storage wallets. But to be clear, these are not self care wallets. Rather, they are a storage format hosted by brokerage firms or online platforms. And depending on the brokerage or platform, this approach can be less secure, as the FTX explosion illustrated. If the brokerage fails or does not handle your coins responsibly, you may lose your investment.
“Choosing the best wallet to use really depends on what kind of person you are. If you struggle to keep track of passwords, accounts, and other important information, you should consider using a wallet provider like Coinbase that can help you get back to your wallet if you forget your password,” says Tyler Moebius, coin. -Founder of SmartMedia Technologies, leading creator of Web3 and blockchain solutions. “However, if security and privacy are a priority, you should choose a self-service solution.”
How to create a software wallet
Setting up a wallet is a simple, straightforward process that can be completed in just a few steps.
Step 1: Select the wallet software you want to use. The first step is to do your research and find the software wallet provider you like best. There are numerous options that offer different levels of protection, ease of use, customer service and price points.
It’s also important to remember when searching that some platforms offer the ability to store your wallet on both desktop and smartphone, while others may only offer one of these options.
Step 2: Download the wallet app on your phone or computer. Once you’ve decided which software wallet to use, the next step is to download the wallet app to either your phone or computer.
Step 3: Create an account. The good news about many software wallets is that there isn’t much involved in creating your account. For example, according to Coinbase, few people need any personalinformation for few information at all, according to Coinbase.
Step 4: Transfer the property. Once your wallet is created, you’re good to go and can start transferring cryptocurrency to your wallet. Often this means transferring crypto from an exchange or brokerage to your software wallet.
“People usually 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 payment method,” says Fraser. If you’re using a centralized exchange, it’s best practice to move assets to a wallet you control as soon as possible.”
There is one important note to keep in mind about software sheep. You are responsible for maintaining the keys to your cryptocurrency assets, which can be problematic if you lose this information.
“If you choose this option, you are solely responsible for maintaining the encryption keys that protect your assets. However, the stakes are high. If you lose your private keys, your assets are gone forever,” Fraser said.
This means that you will probably want to back up your private key information in several secure locations. But you also have to be careful with those backups, because anyone who uses your private keys can take whatever assets those keys protect, Fraser adds.
How to create a hardware wallet
Hardware wallets allow you to store cryptocurrencies offline, which may be an added security or convenience for some investors. The hardware is similar to USB drives and as such is a highly mobile storage format. You can take the wallet with you anywhere. Installing this type of wallet is as easy as a software wallet.
Step 1: Select the hardware you want to use. There are various crypto wallet options available. Some of the most popular names in this space include Ledger, Trezor, and Keepkey, according to Coinledger. Some hardware options are more budget-friendly, while others are easier to use or offer a higher level of security.
Step 2: Purchase the hardware and install the software needed to set up your wallet. Once you’ve purchased the hardware wallet that best suits your needs, the next step is usually to install the software that comes with it, 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 created, you can start transferring cryptocurrency from elsewhere, such as an exchange or brokerage.
Experts recommend self-funding cryptocurrencies. It allows you to manage your crypto assets yourself and keep them under your control. But it’s important to do your research and carefully evaluate whether the hardware, software, or storage wallet best suits your needs.