How to Store Your Cryptocurrency – 6 Alternatives to Cryptocurrency Exchanges
- Users are abandoning centralized exchanges as increased scrutiny highlights reserve issues.
- Secure ways to store cryptocurrency include self-custodial wallets and regulated cryptocurrency custodians.
- There is no one-size-fits-all solution, and different users will have different needs in custody.
The recent collapse of the FTX cryptocurrency exchange was a stark reminder of the vulnerability of these platforms. As one of the world’s leading stock exchanges, this incident sent shock waves throughout the crypto community.
The collapse of FTX has heightened people’s fears that their investments may not be safe on digital asset exchanges. This led to increased scrutiny of exchanges and their reserves, which revealed significant problems with these unregulated, centralized exchanges.
The good news is that alternative ways of storing crypto investments provide better security for users. They range from self-administered wallets like Trust and Trezor to specialized, regulated custodians like Orbitos.io.
In this guide, we’ll go through six alternatives to storing cryptocurrency on a centralized exchange and their particular pros and cons.
1. Hot Storage: Storing Crypto on desktop or mobile wallet
Hot wallets are probably the most convenient way to store cryptocurrency, second only to exchanges. These “hot wallets” are essentially just desktop or mobile apps that store the user’s private keys on their device.
However, they have one key difference from exchanges; allow users to retain custody of their own cryptocurrency. Since the user controls the private keys, they don’t have to worry about any third party losing their money.
Hot wallets are a great way for users to enjoy the benefits while maintaining custody of their funds. However, they come with drawbacks. Hot wallets are more vulnerable to hacking and malware attacks. If a hacker gains control of the private keys, they can empty the entire wallet.
Although many hot wallets come with security measures like two-factor authentication, encrypted keys, and facial recognition, they are imperfect. That’s why it’s imperative that security is a priority.
Some popular hot wallets include Trust Wallet, Metamask, and Mycelium. They are free to use and available for desktop, iOS or Android.
Hot wallets are ideal for storing small amounts of cryptocurrency for everyday transactions. Investors with larger holdings should keep them in cold storage – offline hardware wallets.
2. Cold storage: using a hardware wallet
Hardware wallets are physical devices that provide the highest level of security for crypto assets. Usually in the form of USB flash drives or digital cards, cold wallets allow users to store their private keys online.
Users must connect these devices to their computers or mobile phones when they want to move their possessions. This “cold” offline storage has significant security benefits. These wallets are not connected to the internet, which makes them almost immune to hacking. That’s why hardware wallets are the preferred solution for long-term storage.
Hardware wallets are also a self-hosted solution, meaning users are in charge of their wallets’ private keys.
However, they also have their downsides. The first is that the physical nature of the device limits its usability. Plugging in a device each time to access funds can be a tedious process. Moreover, there is a possibility of theft or loss and damage to the device. If the user loses or misplaces the device, they lose access to the assets in their wallet forever.
Additionally, cold storage wallets are not free. Popular hardware wallets such as Ledger and Trezor cost around $100. That’s why cold storage works best for storing larger amounts of cryptocurrency for longer periods.
3. Crypto Custody Solutions: Providing Keys to a Regulated Custodian
Cryptocurrency custody is an increasingly popular way to securely store large amounts of cryptocurrency. In fact, for institutions and high net worth individuals, it is often the preferred way to store crypto.
Custodial solutions allow users to store their cryptocurrencies with a trusted third-party service provider. Cryptocustodians are regulated entities with clear mandates regarding what they can do with user funds.
Unlike crypto exchanges, custodians do not trade the money they own. They do not lend funds to third parties. Instead, custodians take a small fee from users for their services. This is important because it protects the beneficiary from the risk of the trustee going bankrupt.
However, users entrust their cryptocurrency to a custodian who must provide their private keys. This is a downside because users no longer have sole control over their funds. However, institutions and high net worth individuals still opt for this option and choose to trust regulated entities.
On the other hand, entrusting cryptocurrency to a custodian eliminates the risk of private keys being lost or stolen. In addition, it also significantly reduces the risk of hacking.
An example of a regulated cryptocurrency custody provider is Orbitos – a Lithuanian company that offers custody services to institutional clients. They provide storage solutions for clients who want to store their cryptocurrencies safely and easily.
Ultimately, cryptocurrency custody is an excellent choice for organizations and high net worth individuals who want to securely store large amounts of cryptocurrency.
4. Paper wallets: printing private keys and addresses
Users who do not want to pay a custodial fee or a cold storage wallet have another alternative – a paper wallet. Put simply, a paper wallet is a piece of paper with private keys and addresses printed on it.
Like hardware wallets, paper wallets are one of the most secure ways to store cryptocurrencies. They are cold wallets – completely offline, with no data stored on any device. This makes the user’s private keys relatively safe from hackers.
Paper wallets are also easy to use and set up. And they are completely free. All users need to do is print out their keys on a sheet of paper and store them in a safe and secure place.
However, paper wallets have two major drawbacks. First, they are not the most suitable solution for everyday transactions. Users must manually enter their keys and address whenever they want to move funds.
Another big problem is the risk of losing your paper wallet. If the paper wallet is damaged or destroyed, users will not be able to access their wallets. In essence, their funds will be lost forever. Fortunately, paper wallets can be relatively inconspicuous, so they probably won’t attract much attention from would-be thieves.
This is why paper wallets are great for long-term storage of small amounts of cryptocurrency. They are not a good way to hold larger holdings, as the risks of loss are simply too high.
5. Decentralized exchanges (DEX): Trading without intermediaries
For users who want more convenience and flexibility in their crypto storage, decentralized exchanges (DEX) are a great option. DEXs work like exchanges, but with one big difference; all their transactions run on the blockchain.
Because they use smart contracts, DEXs can allow users to retain custody of their funds. These “non-custodial” solutions allow users to use the exchange without giving up control over their private keys.
This makes decentralized exchanges a good alternative to centralized exchanges. However, there are also some disadvantages of DEX. First, they are not the most suitable solution for beginners. Their user interface is usually more complex than that of centralized exchanges.
Moreover, traders need to understand the specific risks associated with DEXs. Since the DEX space is so new, there are risks associated with the security and correctness of their smart contracts. Bugs, hacks and exploits happen almost every week.
Not all DEXs are as decentralized as they claim. In many, the founding team retains a controlling stake in management tokens. This means that they have full control over the protocol. Moreover, some projects have a hidden backdoor that gives the owner administrative powers.
Navigating the DEX requires a great degree of knowledge and understanding of the DeFi space. Therefore, it is a good option for investors who know crypto technologies. On the other hand, it may not be the best option for those who do not know the space.
6. Multi-Signature Accounts: Split access to multiple parties
Multi-signature accounts are wallets that require multiple signatures to access funds. They are a great way for users to protect their cryptocurrency from hackers, as it requires more than one user to verify the funds. This ensures that at least two people approve all transactions before they can be executed.
Multisig wallets are also great for teams and companies. They can use these wallets to set up shared accounts that require multi-party approval before transactions can take place. This is especially useful in organizations where money needs to be protected from fraudulent actors within the company.
However, multisig wallets have some drawbacks. They are more complex than regular wallets and require more technical knowledge to set up. In addition, they are not compatible with all types of wallets or exchanges. This makes it difficult to move funds to and from multisig accounts without going through a third-party service.
Setting up a multisig account is a great way for users to protect their funds and ensure that only authorized people can make transactions. However, the complexity of setting them up means they are not the most suitable solution for beginners.
Overview – How to choose the right option
When it comes to storing cryptocurrencies, there is no single option that is best for all scenarios. Different storage methods are best for different types of users and different goals.
Hot wallets such as Trust Wallet are the most suitable option for short-term storage of small amounts of cryptocurrency. Crypto-savvy users can also consider storing their cryptocurrency on a decentralized exchange.
On the other hand, users who want to hold smaller amounts of cryptocurrency for longer periods of time should probably use hardware wallets like Ledger or Trezor. For minimal amounts of cryptocurrency, users can also get away with using paper wallets.
For users and organizations with larger amounts of cryptocurrency, multi-signature wallets are a great option. Ultimately, for institutions and high net worth individuals who need to securely store large amounts of cryptocurrency, crypto custodians like Orbitos.io are a great choice.
There is no single solution for storing crypto data. The best storage solution for a user will depend on the user’s situation. With different types of wallets available, users can find the option that best suits their needs.
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