Because there are various options for storing bitcoin, it’s critical to understand the advantages and drawbacks of each.
Summary
When it comes to bitcoin storage, you have three options: use a well-known third-party custodian like a cryptocurrency exchange, keep your bitcoin in your own personal wallet, or use a hybrid solution that combines the two.
Contents
- What Exactly is Bitcoin Storage?
- Bitcoin Storage Options
- Bitcoin Storage Using a Third-Party Custodian
- Self-Storage Options
- Choosing the Right Bitcoin Storage Solution
After you’ve purchased bitcoin or another cryptocurrency, the next step is to figure out how to safeguard your assets. This is especially significant because Bitcoin addresses are basically anonymous, and transactions can’t be reversed in most cases.
This means that it will be exceedingly difficult, if not impossible, to reclaim your bitcoin if it is stolen, lost, or unintentionally transferred.
Fortunately, there are a variety of secure storage solutions for bitcoin, ranging from regulated exchanges to your smartphone to a piece of paper. Before deciding on a bitcoin storage technique, it’s critical to understand the benefits and drawbacks of each option, as well as what “storing” a virtual currency implies.
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What Exactly is Bitcoin Storage?
Bitcoin and other cryptocurrencies are electronic digital assets created and held on a blockchain network. Cryptocurrencies are only available as virtual data, which means they are not physically kept.
Rather, each crypto storage solution saves the extremely specialized information required to access and transfer cryptocurrency stored on a blockchain.
As a result, while the term “cryptocurrency wallet” is commonly used to refer to the “place” where you store your bitcoin and other crypto assets, a crypto wallet is simply a system designed to safeguard certain information that grants access to your intangible digital assets and ensures that only authorized users have access to these funds.
Bitcoin Storage Options
Despite the fact that there are several bitcoin storage alternatives, they usually fall into two categories: third-party custodians and local storage. Hot wallets, which are connected to the internet and thus simpler to access, and cold wallets, which are not connected to the internet and are stored offline.
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Bitcoin Storage Using a Third-Party Custodian
Entrusting a third-party custodian with your bitcoin is similar to holding your cash, stocks, or other financial assets at a licensed financial institution such as a bank or brokerage.
Once a customer entrusts a custodian with their assets, the custodian is responsible for holding and managing those funds in accordance with the customer’s instructions. Many custody solution providers, such as cryptocurrency exchanges, also provide other functions, such as cryptocurrency trading, crypto staking, and exchanging bitcoin for fiat currencies (and vice versa).
Individual investors who do not want to be solely responsible for the security and safety of their digital assets, as well as institutions such as asset managers, hedge funds, and/or high-net-worth individuals who seek or require bank-level protection for crypto security and safety, should use third-party solutions.
Service level agreements (SLAs), which regulate the terms and conditions for storing, accessing, and moving customer cash, detail the operational scope of reputable third-party custodians.
Furthermore, some crypto custodians provide multi-signature wallets, which require several signatures to conduct bitcoin transactions and fund transfers. This architecture can add an extra layer of security or be tailored to meet the needs of complex enterprise-level fund management and governance.
Here are some of the most important characteristics to look for when selecting a financial organization.
Safety & Security: Most prominent crypto custodians cater to both institutional and individual investors, ensuring that retail customers are protected in the same way that corporate clients are.
However, not all crypto custody solutions are created equal, and it’s critical to understand the safety procedures used by a crypto custody provider from both a technological and organizational standpoint, as well as the custodian’s security track record when selecting a crypto custody provider. It is critical to have a thorough grasp of a custodian’s operational success and responsiveness to any previous security or technical incidents before selecting one.
Third-party audits of crypto custody providers are a good way to learn about this.
Regulatory Compliance: Bitcoin custodianship policies are continually evolving and varied across geographical locations, as cryptocurrencies are a relatively new idea.
As a result, there is a wide range of custodians with varied levels of regulatory compliance and control, so make sure you choose a reputable company that is licensed to operate in your area.
Usability: User terms and conditions, fee structures, and transaction procedures vary each cryptocurrency custodian. Before entrusting your funds to a third-party service provider, make sure the custodian’s user criteria match your expectations.
Differentiators to consider include minimum and maximum withdrawal amounts, fund settlement dates, and the capacity to provide valuable paperwork such as tax reports.
Self-Storage Options
The most common alternative to storing bitcoin at a financial institution is to keep it on your own computer. This is a popular choice for people who desire complete control over their coins. There are three forms of crypto wallets in self-custody: software wallets, hardware wallets, and paper wallets.
Bitcoin Software Wallets: A software wallet is a cryptocurrency wallet that may be used on the web on a desktop or on a mobile device. Web-based wallets can be accessible from any phone or computer using a browser.
While these wallets are handy and don’t require any software, they are often regarded as the least secure type of crypto wallet due to their constant internet connection. Desktop and mobile wallets are software-based wallets that are downloaded to your phone or computer and are generally more secure than web-hosted wallets, especially when your device is not connected to the internet.
Bitcoin Hardware Wallets: When not in use, crypto hardware wallets are specialized devices that remain offline. Users must physically connect the device to the internet and initiate the bitcoin transaction in-device to access funds in a hardware wallet, making it impossible to hack remotely.
Hardware wallets are the most secure but inconvenient sort of crypto wallet, therefore they’re best for investors with a high(er) level of technological savvy and self-confidence.
Bitcoin Paper Wallets: A paper wallet is an analog crypto wallet that is formed by printing two strings of characters and two QR codes onto a piece of paper using a public and private key pair generated by a key generator tool.
While paper wallets are supposedly “unhackable,” they are readily misplaced or stolen due to the primitive nature of paper as a technology. Many people consider that these wallets are inherently dangerous, time-consuming, and unworthy of risk.
While having control over your own storage may sound tempting, there are risks involved because there is no third party to intercede if you lose access to your private key, such as a bank or bitcoin exchange. As a result, the hazards associated with crypto self-storage are identical to those associated with holding fiat cash in your physical wallet or in a secret location only you know about.
Because there is no third-party involvement in the management and storage of these assets, if your wallet is stolen or lost, you forget where you hid your money, or you become incompetent or pass away unexpectedly, your cash may be lost forever.
To summarize, crypto self-storage is arguably the most secure and independent option to keep your crypto assets – but only if you’re ready to shoulder a significant amount of risk.
Investors who choose this storage option will need to keep their necessary software up to date on a regular basis and discover measures to limit the risk of human error and theft without the help of a third party. In addition, these investors should have a plan in place for how family members or intended beneficiaries would be able to collect their crypto funds in the event of an emergency.
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Choosing the Right Bitcoin Storage Solution
As the bitcoin business expands, there will certainly be an increase in the number of custody solutions available to meet a variety of customer needs.
A regulated financial institution may be the best match for storing your crypto if you are comfortable placing your assets with a financial institution such as a bank. You might prefer a self-storage wallet if you prefer to have complete control over your assets without relying on anybody else — and don’t mind taking on the additional personal responsibility and risk that comes with it.
Bitcoin custody, on the other hand, does not have to be a binary choice, and investors are free to distribute their crypto assets in any way they see fit.
Self-storage wallets, for example, might be used to retain small quantities of bitcoin on hand for trade and everyday use, while third-party custodians may be entrusted with greater sums of crypto or digital asset inheritance.
In addition, a growing number of partial custody options combine the advantages of third-party and self-storage custody. Self-managed wallets with some amount of third-party help and corresponding institutional controls or protections are available with this type of solution.
This approach may be a good fit for some retail or high-net-worth investors who want to keep control of their investments but want some assurance and institutional safeguards without going all-in on full-fledged third-party management.
In brief, while third-party custody and self-storage are the two fundamental pillars of crypto custody, you can choose from a wide range of bitcoin storage solutions and disperse your assets according to your changing needs.
Although blockchain technology was intended to allow people to take control of their own life without relying on third-party authorities or intermediaries, the benefits of blockchain do not negate the necessity for trusted institutions in all use cases and scenarios.
As a result, the best combination of self-sovereignty and third-party management for your crypto is ultimately up to you.
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