Where to Store
Learning Objectives
In this section you will learn about some of the different options available for storing cryptocurrency.
Mining
I have included a brief section on mining as I refer that as a cost to consider when transfering crypto currency from one wallet to another. The movement of crypto currency from one wallet to another is confirmed by what are known as miners. In fact they are computers that calculate a bunch of transactions to try and find the solution to an incredibly complex problem. The entire world are competing against each other to solve the same puzzle and be rewarded with a confirmed block. The miner who solved the puzzle is rewarded with some coins for their trouble. This is called POW Proof Of Work which means the miner had to do some work in order to calculate many thousands of hashes until the problem was solved. (I will write an entire section on mining for future reference)
Paper Wallet
In the early days of crypto-storage the most secure method was with a paper wallet, also called cold storage. It is secure because the wallet is not on the internet. It is printed using software stored on a linux based bootable cdrom using a computer or laptop that is not connected to the internet. It is very important that you disconnect from wired and wireless internet when using the application. Connect your printer to your computer using a USB cable.
When printed the wallet will have the public address, used to deposit coins and the private address used to withdraw the coins. The wallet does not contain any coins after printing, to load a wallet you withdraw coins from another wallet and deposit (send) to the public address which will be a QR code printed on the wallet.
Keep the paper wallet safe, if you lose it. Damage the private key QR code you will lose access to the coins stored in the wallet.
PROs
Very secure completely off grid solution to storing a single cryptocurrency, often called cold storage.
CONs
Paper based which can be damaged easily though water, fire and general wear and tear if not stored in the proper conditions.
Depending on each currency there is a fee paid to miners who confirm your transaction
Can only store one currency and really just one initial transaction to receive
When withdrawing you must move everything to avoid losing the remainder
Need your own laptop, printer and specialist software to print the paper wallet, this not something you can get someone else to do as the private key is printed on the wallet, you don't want someone else knowing it otherwise they could take all your coins.
Hardware wallet
The need for better storage solutions became apparent, as technology improved it has led to the development of hardware wallets. These devices are standalone linux computers typically on a tiny device in similar size to a car remote key fob or usb memory stick.
The device is used to confirm a crypto transaction by pressing a button on the device, it is not connected to the internet and provides the safest way to store many crypto currencies on the same device.
Here are a few examples:
trezor: Model T
Ledger: Nano X
Exodus: Beginners
Electrum: Advanced
Mycelium: mobile users
Ledger: Nano S
PROs
Ultra secure mini linux computer in a key fob or usb size device that signs (approves) crypto transactions
Can store many currencies on the single device
If you loose your device you can buy a new one and recover your wallet using your recover seed
CONs
Devices can be expensive for holding small amounts
Requires a PC, (Windows, Mac or Linux) with a USB connector
Needs an internet connection to gain access to view the wallet contents
If you loose your recovery seed you cannot access your wallet. (Don't loose it)
Depending on each currency there is a fee paid to miners who confirm your transaction
Crypto wallet linked to pre-paid visa card
Coinbase
This means you can link a wallet from your Coinbase exchange account to you pre-paid coinbase visa payment card. Each time you buy something the amount is converted to crypto and the number of coins / tokens are deducted from your wallet balance to pay for the goods or services.
PROs
Excellent way of spending your crypto without having to convert it to money
You take advantage of any price increase because your coins are in your wallet
The exchange will keep records on your purchases to you can calculate any tax due on any gains
CONs
If the price drops then your crypto is not worth as much, you might not want to use it to buy things.
Exchange
If you decide to trade your coins quite often you will need to keep them on the exchange while they are in a buy or sell order.
Some exchanges operate direct from your hardware wallet so this doesn't apply to them.
Most exchanges have increased security in place and are so confident they offer free insurance to users that covers to value of the crypto currency in their exchange wallet should the exchange be victim to a hack and coins are stolen.
This is applicable if the exchange was hacked and coins were taken direct from the hot / cold wallets.
If someone gained access to your account because you had a simple password, you didn't have 2 factor authentication enabled or had withdrawal wallets whitelisted then that would be your own fault for not properly securing your account.
PROs:
Easy access to coins for high frequency trading
Stored in a secure wallet managed by the exchange
Exchange has an insurance policy that covers the value in case of a hack
CONs:
Exchange gets shutdown by the FBI or internal issue
If your exchange password and security settings are poor and your account is hacked, you’re not covered by the insurance.
Depending on each currency there is a fee paid to miners who confirm your send transaction
Summary
Storing crypto has many options, Paper, Hardware, and Exchange being a few. You will experience paper wallets if you buy crypto from an ATM but don't already have a wallet address.
If you decide to hold a few hundred to a thousands in crypto then you should invest in a hardware wallet to keep your stash secure.
Next Steps:
If you haven't already bought some crypto from an ATM you should consider that and then use the paper wallet to transfer to an exchange account to trade.
If you are planning on regular ATM purchases then a hardware wallet would be wise investment to get a QR code of your deposit address so your ATM purchases will go direct.
As with buying and selling there are also fees for moving currency between wallets so you really need to limit them to a minimum.
I am planning some detailed blogs on the practical side so please look out for those in the future.
If you can't wait please get in touch with any questions you may have.