When it comes to keeping your crypto secure, there are many types of crypto wallets to choose from – each with pros and cons. So let’s run through some of the main crypto storage methods to see which one makes the most sense for you.
Unlike the wallet in your pocket, crypto wallets don’t store any currency. The coins and tokens you own represent pieces of code on a blockchain. Most crypto wallets involve storing that code in the form of your public and private keys. Together, these keys let you access your funds and transact on the blockchain.
When it comes to storing your keys, you have two options: store them with a third-party platform (like a crypto exchange), or store them yourself (self-custody).
Crypto exchanges take custody of your crypto, meaning they’re responsible for keeping it safe. This comes with three main advantages. Firstly, you can still access your crypto if you forget your password – though you might have to jump through a few authentication hurdles to do it. Secondly, crypto exchanges are very convenient for traders because they can access their crypto and trade there and then. Thirdly, top tier crypto exchanges have excellent security nowadays.
With all that being said, there are disadvantages too. For one thing, you can’t plug into decentralized finance (DeFi) and NFT applications on the blockchain from an exchange. You also don’t technically own your crypto when you deposit it on an exchange – so you need to trust that exchange to always act in your best interests.
There have been times when exchanges have held up customer withdrawals at their own discretion if they think there’s a valid reason to do so. For example, some exchanges or crypto lending platforms might treat your crypto as company debt if the platform goes out of business. So in a worst case scenario, your crypto could be used to pay off the company’s creditors as a consolation prize. Of course, that’s not the case with all exchanges, so make sure you read the fine print before choosing one.
Everyone has a story about their cousin’s friend getting their crypto stolen. Thing is, you don’t often hear about any big institutions having the same problems. That’s because most of them ditch private keys for an advanced type of cryptography – multiparty computation, or MPC for short – that keeps their crypto extra safe.
There are a few ways to securely store your keys yourself. At the most old school end of the spectrum, there’s paper wallets, which you can set up using a website like bitaddress.org.
Paper wallets have three main advantages: they’re free to set up, they’re not connected to the internet – known as “cold storage” – so they’re highly secure, and only you have access to your wallet.
But there are major disadvantages too. First, you need a different paper wallet for every individual blockchain where you own coins and tokens. For example, if you wanted to store ether or other Ethereum based tokens, you’d have to create another wallet using myetherwallet.com. This means you have a lot more paper to manage if you have a lot of different coins. Second, you need to securely store all that paper somewhere – there's no safety net if you lose it or it gets stolen.
Hardware wallets like Ledger and Trezor are portable USB sticks that store your private keys. As with paper wallets, they’re a form of cold storage because they aren’t connected to the internet, and only you have access to your keys. But unlike paper wallets, hardware wallets can come with backups in case you lose your private keys, and a single wallet can store coins and tokens from multiple blockchains. Top of the range models can also integrate with online non-custodial wallets and you can use them to trade crypto on a number of different blockchains, keeping full control over your crypto at all times.
Keep in mind that hardware wallets are more expensive than paper wallets: they usually cost between $100 and $300.
Online non-custodial wallets, like MetaMask and Coinbase Wallet, are another way to store your own keys. Unlike exchanges, paper wallets, and some hardware wallets, these link straight into the DeFi and NFT ecosystems on the blockchain.
These wallets come in the form of desktop extensions or user-friendly mobile apps. Mobile apps are usually the most secure, as phones normally have better virus protection than old desktops and laptops. Remember, because they’re online, they’re only as secure as the device you’re using to access your funds.
When you first set up an online non-custodial wallet, the wallet provider usually asks you to come up with a seed phrase and then create a password on top of that. Whatever you do, make sure you don’t lose those, as it can be a long process trying to regain access to your funds – if you even manage to at all.
Institutional investors – like hedge funds and family offices – outsource crypto custody to institutional-grade providers to keep client assets secure. This also helps institutions meet their regulatory obligations: the custodians are independent of the investment manager, who can’t access the crypto without going through the custodian first.
Institutional custodians use their own patented methods for securing client crypto. Some of them, like Fireblocks and Copper, for example, use multi-party computation (a.k.a “MPC”) to create extra layers of security. Without getting too technical, this involves splitting private keys into several independent “shares,” which can be more secure than having a private key exist in one place.
Of course, these products are aimed at institutional investors, and they’ve got tiered fee structures to go with that – the more assets you hold with a custodian, the more cost effective it becomes. So this option would only make sense if you’re stacking serious amounts of crypto.
ZenGo is an online wallet that uses MPC as well, except it’s used by everyday crypto investors rather than large institutions. This is more a hybrid solution between storing your keys yourself and using an exchange. The company splits your key into two secret shares: one held by you and the other by the company. This would offer more control of your crypto than you would get with most exchanges, but not as much autonomy as you would have when storing your own keys with MetaMask or Coinbase Wallet. As with exchanges, you pay a fee to the company when you buy or sell crypto.
ZenGo does allow you to transact on the blockchain. And it doesn’t have passwords or seed phrases, which means there's no risk of losing them. Instead, you can secure and recover your funds through your own encrypted biometrics, such as a face scan.
This guide was produced by Finimize in partnership with Zengo.
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