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Digital Asset Storage

by Julie Mendel | Dec 06, 2018

Explaining Cryptocurrency Keys and Storage

Important Tax and Accounting Topics from WebCE The concept of digital assets is challenging to understand. There is so much information available on cryptocurrency that it is hard to decipher between useful and irrelevant information. In October, we posted an article on Understanding Bitcoin that explained the basics of cryptocurrency. In this article, we will identify the two types of keys and two types of storage when it comes to managing your cryptocurrencies.

Types of Cryptocurrency Keys

There are two types of keys that represent cryptocurrency. There is a public key that identifies the cryptocurrencies you receive and allows you to send them to someone else. It functions as an email address. The second type of key is a private key which is a code like your password and is required to access your cryptocurrency.

Cryptocurrency Storage 

There are many ways to store and transfer your cryptocurrency and its associated private keys including mobile applications, third-party services, hardware, and even print versions of the private key. When you are deciding between cryptocurrency storage options, you must keep in mind that cryptocurrency is a piece of computer code and this in and of itself makes it vulnerable to cyber-attacks, hacking, and human error.
Cryptocurrency storage is different from keeping cash and stock certificates safe because they aren’t recognized as securities. Cryptocurrencies lack the standard coverage for financial assets that traditional investments enjoy.

Storage Methods for Cryptocurrency

There are two cryptocurrency storage methods commonly referred to as hot and cold storage.

Cold storage involves keeping your private keys disconnected from the internet. This usually includes storing them on external drives such as USBs, or just printing them on paper. The upside of cold storage is that you reduce your vulnerability to being hacked. The downside is that you open yourself up to theft, product defects, loss, destruction, and other losses related to physical storage.

Hot storage means that your private keys are connected to the internet, most commonly through cryptocurrency wallets. Cryptocurrency wallets are software applications installed on your internet-connected device (computer, tablet, smartphone, etc.). There are three primary types of cryptocurrency wallets available today:

1. Desktop wallet – A software program that is downloaded to your computer and stores your private keys to the hard drive of that specific computer.
2. Mobile wallet app – An app that allows you to store your private keys to your internet-connected mobile device.
3. Online wallet – A software program that will enable you to access your private keys from any internet-connected device. This means that your private keys are stored remotely on a third-party server typically owned by the online wallet provider.

The advantages of using a cryptocurrency wallet are convenience and access. The disadvantages are the same as any internet-based service including vulnerability to hackers, malware, etc.

Before you decide on which option is best for you, research the provider, the technology behind the cryptocurrency, storage platform or service, and use the solution that best meets your comfort level. Understand the ups and downs of all your options. Remember there is limited regulatory oversight for cryptocurrency and hackers are smart. They often pose as an exchange employee or tech support to gain access to your information!