Central data centers such as Google, Amazon or Facebook create a single point of failure that is easy to identify and attack. Decentralizing the process through blockchain technology distributes risk among everyone with a copy of the ledger. This forces an attack to take more than half of the network to verify in what is known as a 51% attack. The bigger a blockchain becomes, and the more decentralized it becomes, the harder it is to get an attack like this.
However, the trade-off to eliminate the requirement of third-party brokerage services is that the protection of cryptocurrencies becomes the sole responsibility of the holder. This creates an inherent risk that most people have never faced. Users essentially become their own bank or give up custody of their cryptocurrencies when using certain third parties such as exchanges.
Where to store your cryptocurrencies
Once users are familiar with the basics of cryptocurrency and blockchain technology, they can start buying, selling, and trading cryptocurrencies. Deciding where to store your cryptocurrency is one of the most important steps to fully understand its potential.
There are many different ways to store cryptocurrencies, and each brings its own strengths and weaknesses. Below, we’ll list the many different ways you can store your crypto assets.
Most of the larger exchanges operating today offer their users custody wallet addresses. As a result, they are an easy access ramp for new users in the space and often provide additional services and benefits to store your cryptocurrencies with them. These can include options for staking, yield farming, referral programs, and crypto credit cards.
There are non-custodial exchanges, but storing your cryptocurrencies on exchanges, for the most part, requires giving up custody of your private keys. This can be a security risk due to exchanges that are great targets for hackers or founders of malicious exchanges that drain users’ funds.
If you feel you can’t trust your crypto, an exchange wallet might be right for you.
Hot wallets refer to private custody wallets connected to the internet. They provide additional security on exchanges as they allow users to maintain control over their private keys. In addition, they are an easy way to introduce users to the advantages of self-custody over their cryptocurrency and provide good interoperability between crypto projects. The most widely used hot wallet is Metamask.
The main weakness of using a hot wallet is that they are only as safe as the device on which they are stored. If the computer you’re using is potentially damaged even your hot wallet. In addition, users will need to familiarize themselves with the importance of protecting their private key information. If lost, so is their access to their wallet.
work similarly to hot wallets. They offer users full custody of their cryptocurrencies with the added security benefit of being completely offline. Cold wallets are the safest way to store cryptocurrencies.
The main disadvantages of cold storage wallets are that they do not allow you to access the same reward benefits as exchanges. Also, they can be a bit intimidating for users. The benefit of taking complete control of your digital assets is unparalleled, but so is the responsibility to do so. Therefore, before interacting with cold storage wallets, users should understand the importance of keeping private keys and storing them in a safe and secure place.
An interesting note is that you can add a cold wallet to protect a hot wallet (like MetaMask) and potentially get the benefits of both.
Why split it
Whether you’re new to the space or an advanced user, splitting your digital assets between different accounts is beneficial. Some may prefer the easy access offered by exchanges, while others may only want the safest option of cold storage.
If blockchain technology has taught us anything, it’s that centralizing everything creates a central point of failure. For example, if you store all your assets in a custody exchange and that exchange fails or collapses like Celsius, MtGox, or QuadrigaCX, there may be no way to recover your assets. Similarly, if you choose to use only a single hot or cold private wallet to concentrate all your resources, you are faced with a similar dilemma. If all your assets are in one place and you lose access to your private key information, as James Howells did in 2013, there’s no way to recover it.
Are there any downsides?
The main disadvantage of splitting your cryptocurrency is that you are introducing multiple attack vectors for potential hackers or scammers.
In reality the biggest danger may just be to lose track of where you are storing your cryptocurrency. Small amounts of cryptocurrencies can disappear easily if you don’t track them carefully.
There are many users who prefer to store all their cryptocurrencies in one super secure wallet and basically “set it up and forget it”. Obviously if that wallet is compromised, the entire crypto balance is gone.
We suggest you take an approach that works best for you with at least a couple of contingencies in place if things go wrong.
In summary, there is a risk of storing your crypto assets, regardless of the medium you choose. Some methods contain a higher risk than others, while some require you to take more responsibility.
By using the horcrux approach, you can reduce the risk of storing your crypto assets. This concept is not about diversifying your crypto wallet, rather how to protect it and protect it from every single point of failure. Each storage solution comes with risks and rewards, but spreading resources across locations can help protect you in the long term.