Explaining Cryptocurrency Keys and Storage
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!