What is a cryptocurrency, exactly?
A digital payment system known as cryptocurrency isn’t reliant on banks to validate transactions. Thanks to peer-to-peer technology, payments can be issued and received by anybody, anywhere. Cryptocurrency payments do not exist as actual physical cash that is carried and exchanged in the real world; rather, they only exist as digital entries in an online database that detail individual transactions. A public ledger monitors all bitcoin transactions that contain money transfers. Cryptocurrency is stored in digital wallets.
Since transactions are verified via encryption, cryptocurrency earned its moniker. This implies that the archiving, transmission, and recording of bitcoin data to public ledgers all require intricate code. Encryption’s objective is to deliver security and protection.
The first cryptocurrency was Bitcoin, which was created in 2009 and remains popular today. The majority of interest in cryptocurrencies is to trade for gains, and investors sometimes see their values skyrocket.
In this article learn to safeguard your investments and stay safe from cryptocurrency investment scams.
How does cryptocurrency work?
A distributed public ledger known as the block chain is the framework for cryptocurrencies. Currency holders update and hold it.
Cryptocurrency units are generated via a process known as mining, which utilizes computational power to solve intricate mathematical problems, resulting in the creation of coins. Alternatively, users have the option to purchase these currencies from brokers and manage those using cryptographic wallets for storage and transactions.
If you possess cryptocurrency, you do not possess any physical assets or tangible objects. What you actually own is a key that lets you transfer a record or a unit of measure from one individual to another without a trusted intermediary.
Despite the fact that Bitcoin has been in existence since 2009, cryptocurrencies and blockchain technology applications are still emerging in financial terms, and additional usage are expected in the future. The potential exists for technology to enable the trading of various financial assets, including bonds, stocks, and other types of securities.
Cryptocurrency Storage
Before we dive into the world of commonly used storage types, let’s look into why cryptocurrency storage is so vital for crypto investors and traders
Why does cryptocurrency need storage?
Cryptocurrencies are digital tokens developed to be shared using encrypted transactions via decentralized computer networks known as blockchains. Crypto wallets are a means of making digital currency tokens available, so you can send and receive tokens between two different accounts even though they are stored on the blockchain.
Public keys, also referred to as wallet addresses, are used to transfer funds between wallets. A public key is essentially a one-of-a-kind account number for each type of cryptocurrency you own. Each ‘account’ also possesses a private key. Protecting this data through a wallet is a key component of crypto storage.
According to experienced crypto educator Danielle Marie, the need to protect private keys is a popular understanding gap for new investors. She provided accredited blockchain training and created the non-profit networking group All Things Blockchain.
Marie clarified that private keys are a long string of letters and numbers that are used as a unique identifier—they verify ownership of a particular wallet and grant individuals the right to access and regulate its assets. If you lose access to a wallet, you can recover it using a seed phrase, which is a string of 12 to 24 words.
The majority of crypto theft occurs when malicious actors get their hands on private keys via hacks of exchanges or wallets or con games that get victims to reveal them. If private keys and seed phrases are lost or unintentionally destroyed by the owner of the asset, tokens may also be permanently lost.
Effective security also matters since blockchain transactions are never-ending and irreversible. The distributed and largely uncontrolled nature of crypto means there’s no third-party institution that safeguards your tokens or ensures your investment (like a bank or the government) if anything goes wrong.
Types of Crypto Storage
Crypto Exchange
Crypto exchanges are fundamentally digital marketplaces that let you utilize real money ($AUD) to purchase cryptocurrency such as Bitcoin and Ethereum, exchange one type of crypto for another, and shift your crypto back into cash.
The majority of popular exchanges like Binance, Coinbase, CoinSpot, and eToro are run like any other online platform (that is, they don’t leverage the blockchain and are considered ‘centralized’). This is also why they’re well-known: they’re user-friendly and easy to use. Decentralized exchanges that encourage direct peer-to-peer transactions are around, but they are typically more complex to use.
Your account on a centralized exchange may be described as a wallet. But if you store your cryptocurrency on an exchange, it usually means the company retains ownership (or “custody”) of the assets and you cannot access the private keys. This is referred to as a custodial wallet or, at times, a hosted wallet. You must have confidence that the exchange’s operator will uphold order and safeguard your assets.
Unfortunately, while the majority of exchanges are legal and vigilant, it only takes one bad trade to wreak havoc throughout the entire industry. Thousands of investors trusted Sam Bankman-Fried’s FTX with their cryptocurrency holdings, which were later discovered to be supporting his Alameda Research hedge fund. Sam Bankman-Fried’s company has since filed for Chapter 11 bankruptcy. Bankman-Fried is currently being prosecuted for fraud.
Hot Crypto Wallet
Online, software-based crypto wallets are known as hot wallets. Due to its internet connection, your crypto exchange account qualifies as a “hot wallet.”
Particularly, non-custodial or self-custody hot wallets are internet-connected wallets where you manage the private key and seed phrase for your crypto assets. The private keys are held within the app/software itself.
It is simple to utilise a non-custodial wallet through a web browser or app, but like with everything online, this makes these wallets vulnerable to cybersecurity threats, hackers, scams, and fraud.
Cold Storage
Offline wallets are referred to as cold wallets. Nowadays, that typically refers to a physical item, such as a USB drive or specialized hardware with special security and accessibility features. Cold storage can also involve printed documentation but it’s a method that’s become less popular due to paper’s fragility.
What Kind Of Crypto Storage Is Safest?
Similar to how spreading your investments can lower your risk, it might be a smart idea to distribute your valuables among different storage options. In the event that one of your storage choices is compromised, you can lessen your chance of losing everything by combining your storage methods, advises Danielle Marie.
A hardware wallet is arguably the safest way to keep cryptocurrency. However, Marie explains that the efficiency of cold storage depends on its proper application.
The need of keeping private keys offline is acknowledged by Samira Tollo, who makes the case for investors to incorporate cold storage devices into their self-custody procedures. According to her, people believe it to be ‘clunkier’ to operate, although in reality there is just one extra step: plugging into your computer
Tollo provided a two-layered strategy to mitigate risks while reducing the complexity of managing private keys and wallets:
Layer 1, hot wallet: Since hot wallets are already online, using them to connect to online services is simpler. When making withdrawals, deposits, or using dApps (decentralized applications), you would give exchanges this wallet address, the spokesperson explained.
Layer 2 cold storage: It is best to shift them to a cold wallet after you have completed interacting with these online protocols, or have some crypto that you want to keep long-term.
Marie and Tollo both advise having a tangible record of private keys and recovery phrases that is safely maintained offline, such as a piece of paper or a metal engraving kept in a safe, as an additional backup.
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