With the surge of interest in bitcoin and other cryptocurrencies, hackers have stepped up their game. Knowing that crypto newbies know very little about how to store their currencies, cyber criminals have increased both the quantity and sophistication of their efforts to steal funds.
Hacks and cybersecurity aside, it’s important to understand the fundamentals of cryptocurrency storage. Bitcoin and other cryptocurrencies are usually stored in a digital wallet, which can be either hardware-based or web-based. A set of private keys allows a user to access his or her cryptocurrencies.
Herein lies the biggest security risk: If the private key is lost or stolen, the user loses the crypto assets.
There are other ways to lose the crypto assets: The PC or device where the digital wallet was stored could crash or be stolen. And of course, there are hackers looking to exploit vulnerabilities.
Let’s have a look at some of the ways to store bitcoin and other cryptocurrencies safely.
Hot Wallet
A hot wallet is essentially an online wallet that is run on an internet-connected device such as a PC, tablet or smartphone, or a site that’s available on the web.
Because the wallet generates the private keys that grant access to a user’s cryptocurrencies, the hot wallet can be compromised by a security vulnerability in the user’s device or internet connection. While a hot wallet can be very convenient as far as access to crypto assets and the ability to make transactions, cyber risk is high.
Cryptocurrency users generally use hot wallets for small amounts of cryptocurrency. The analogy is that a hot wallet would be similar to a checking account, used for bill pay and regular purchases. A savings and investment account would be used for larger funds and long-term financial goals.
Cold Wallet
Opposite a hot wallet is a cold wallet, which is a safer storage option because the cold wallet is not available on a connected device or on the internet. As such, there is a much lower risk of misuse or compromise. Cold wallets are also known as offline wallets or hardware wallets.
These wallets store information on a device that is not connected to the internet, such as a USB drive that stores a user’s private keys securely. Typically, there is also accompanying software, so that the user can view his or her portfolio without placing the private key at risk.
Perhaps the most secure way to store cryptocurrency offline is via a paper wallet. A paper wallet is a cold wallet that essentially has users print off public and private keys from certain websites. The security of this method — and the ability to access the cryptocurrency — lies in the ability to access that piece of paper. Some people even store these in a safe in their home or a safe deposit box at a bank like they would with other highly valuable assets.
Crypto Vaults
As yet another option to store bitcoin and other cryptocurrencies, different crypto exchanges offer a type of storage known as a vault, which has extra security measures built in to prevent stored crypto from being immediately withdrawn.
In a vault offered by Coinbase, for example, users can also choose to split ownership between multiple users and email accounts, requiring these users to approve of a transaction before it can be completed.
Vaults also go through a secure approval withdrawal process after creation. Unapproved vault withdrawals are automatically canceled within 24 hours.
Crypto Custodians
For those who own large quantities of tokens, such as institutional investors, cryptocurrency custody solutions have emerged as another storage option.
Crypto custodians are needed in part because of regulation. As part of the Dodd Frank Act, institutional investors that have customer assets worth more than $150,000 are required to store the holdings with a “qualified custodian.” As such, banks and registered broker-dealers who hold crypto on behalf of institutional investors, such as high-net worth individuals and hedge funds, need to offer cryptocurrency custodial services in order to remain compliant. Likewise, such institutional investors want to know that their digital assets are being securely stored with a trusted third party.
Decisions, Decisions
As each crypto investor has different needs and requires varying levels of access to his or her assets, there is no single, one size fits all solution.
Some might use a combination of solutions all at once. For example, in order to use cryptocurrency for daily transactions, a hot wallet would seem most convenient. However, to hold cryptocurrency for the long term, that same investor would have some crypto stored in a cold wallet or offline storage with very rare access to it.
Even further, that same investor might keep some of his or her crypto funds with a broker-dealer, who in turn uses a proprietary custodian service to safeguard assets on behalf of that investor.
The other benefit of maintaining various storage options is that varying touchpoints also mean that cyber risk is mitigated.
Further Security Measures
One important limitation with all of these methods of crypto storage is that they treat cryptocurrency as a bearer asset — meaning that whoever holds the private key is considered the owner. This can make it extremely hard to demonstrate proof of ownership should a private key be stolen or lost (and is one of the many reasons why institutional players have been slow to accept cryptocurrency).
At TransitNet, we’ve set out to create the first offchain title registry of record for digital wallets to create an additional layer of protection for cryptocurrency assets. We are building a comprehensive platform to empower individuals and businesses with the option of creating a record of title for their crypto.
Interested in being at the forefront of the new crypto infrastructure? Request an exclusive registration for TransitNet’s title registry when it launches today!
Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.
Sources
Investopedia – What are the Safest Ways to Store Bitcoin?
Coinbase – Vaults