21 Oct 2021
Cryptocurrency has long been of interest to investors looking for the latest opportunity to diversify their portfolios. Unlike stocks and bonds, cryptocurrency can’t be purchased through a traditional brokerage account, meaning that it has to be bought on a cryptocurrency exchange such as Coinbase. For investors just dipping their toes into the market, keeping their cryptocurrency on the exchange where they bought it is usually the easiest (and cheapest) way for them to hold it. However, those looking for more security may opt for a cryptocurrency wallet, which is either a software or hardware option designed to offer more protection for your investment.
Why a Wallet?
Technically, cryptocurrency that you purchase and leave on an exchange is already in a type of wallet. Those coins might be vulnerable, though, if the exchange is hacked. This is why investors who have larger amounts of Bitcoin, Ethereum, or other cryptocurrencies, or those who are very worried about the possibility of theft or fraud, may opt for an individual cryptocurrency wallet.
Each wallet comes with a public and private key. The public key is like a bank account number—this is the information needed to send and receive money to your account. The private key is like your bank password. You’ll need this to access your account to do things like move or spend your cryptocurrency.
Cryptocurrency wallets come in two main types: hot and cold. The kind that is right for you depends on both your level of risk aversion, your investment habits, and how much you want to spend. (Be aware that not every exchange will allow transfers out to an individual wallet. If you’re not sure what you want to do with your holdings but want to keep your options open, make sure you choose an exchange that does.)
A hot wallet is a form of digital storage connected to the internet. Like a wallet on an exchange, which is also online, it’s easy to access from your computer or your phone. This makes them more convenient if you think you’re going to be doing frequent trading because it is easier to transfer your holdings back onto an exchange. Hot wallets are often available free of charge, which is a consideration if your holdings are relatively small and you don’t want to have to spend additional money for improved security. However, they’re not a complete guarantee against digital attacks, even if they are a step up from keeping your coin on the exchange. Hot wallets are also prone to keylogger or malware attacks; keystroke encryption can help plug this vulnerability.
A cold wallet is a physical storage device that keeps your cryptocurrency offline. These may also be called a hardware wallet or cold storage. The advantage of such a device is that it offers a much higher level of protection against hacking or online attacks. When you set up a cold wallet, you also set up a 24-word phrase to create your private key. This key must be kept completely offline, safe and secure because it can be used to rebuild your cold wallet onto another software or hardware device. Used as intended, this protects you against the event your first device is damaged or destroyed or allows you to create multiple hardware wallets to distribute to trusted associates. Carelessly left accessible, that phrase can enable a thief to rob you with a duplicated wallet.
A cold wallet can also cost up to $200—make sure you purchase directly from a manufacturer, as secondhand wallets may have been tampered with, leaving your account vulnerable. These devices make the most sense if you have a more sizeable purchase that you intend to hold for a long period of time.
Your Source for Cryptocurrency Knowledge
Investing without knowing what you’re getting into is a recipe for losing money. Petronella can get you up to speed on what you need to know about cryptocurrency before you buy. We offer two convenient online courses:
Crash Course on Cryptocurrency: How to get set up safely with your first digital wallet and how to buy, sell, and transfer cryptocurrency.
Intermediate Cryptocurrency Course: For investors who’ve gotten started and want to move beyond the basics to learn more about investing, exchanges, and evaluating the potential of emerging new types of cryptocurrency.
If you’re worried that the opportunities of cryptocurrency are passing you by, don’t wait. In addition to our courses, Petronella can provide individualized advice to inform your cryptocurrency investment strategy. Get all your answers with the team at Petronella—contact us here.