Crypto’s Greatest Benefit Is Also Its Biggest Risk
The grocery clerk looks at you and shakes his head. “Sorry, your card has been declined.”
You step outside to call your local bank to see what’s going on. But no one picks up the phone.
Furious, you drive to the branch where you originally opened a bank account and deposited the funds. Upon arrival, there’s a “permanently closed” sign taped to the door, and the windows are boarded up.
Now in a state of panic, you open your phone and read a story stating the bank’s CEO has passed away, and the keys to the vault with all of your cash have mysteriously disappeared.
Now imagine that the safe is totally impenetrable. And if anyone attempts to crack it open, all the money inside will be destroyed.
Of course, this can never happen in real life.
Under Federal Deposit Insurance Corp. (FDIC) rules, deposits are insured up to $250,000. Furthermore, our monetary system is controlled by the payment processors and banks that keep track of who owns what.
If there is a fraudulent transaction on your credit card, it can be remedied with a somewhat insufferable phone call to Citibank’s customer service department.
But that’s not the case for crypto.
If you lose your private keys, or, even worse, if someone steals your private keys, your crypto can be digitally transferred to a place where you can no longer access it.
That means if you aren’t careful, the imaginary scenario I presented can become a reality.
And unlike the centralized banking system, there is no fail-safe in place if this happens.
There’s no customer service line to report a fraudulent transaction.
There’s no FDIC backstop that insures against ruin.
Your cryptocurrency is not tied to any centralized organization.
It may feel liberating to own something whose value is not connected to a bank or a government. But it can also feel terrifying to think that its value could instantly vanish.
The Crypto CEO Who Mysteriously Died With Customers’ Coins
In the last few weeks, investors received a not-so-subtle reminder of the biggest risk to owning crypto.
The Canada-based QuadrigaCX exchange announced it declared insolvency and was ending withdrawals for 115,000 customers.
In an even more mysterious twist, the exchange also announced that it had lost access to $190 million worth of its cryptocurrencies. That’s because its founder, Gerald Cotton, died unexpectedly on a humanitarian trip to India.
Cotton reportedly was the only one who had access to QuadrigaCX’s offline crypto storage. And now nobody knows where he stored the private keys — the passcodes that would allow customers to get their crypto back.
That leaves 115,000 customers without access to their cryptocurrencies left on his exchange.
How to Securely Lock Down Your Crypto Assets
Cryptocurrencies are digital goods. There is no physical, tangible representation of a cryptocurrency.
This means you can neither store your cryptocurrencies under a mattress nor bury them in the backyard.
They can only be stored in software programs called digital wallets. Every time a cryptocurrency is moved, it goes into another digital wallet.
To access your cryptocurrencies in a digital wallet, you need your private key (equivalent to a password). Anyone who has access to the private key for your wallet has access to your cryptocurrency.
Here’s a list of the various types of wallets, with different functionality and security:
Desktop wallets. This software sits directly on your computer, which also stores your private keys. Desktop wallets are secure and easy to use, and have limited attack points. However, your wallet is at risk if your computer gets hacked or stumbles across a virus.
Top pick: Exodus Wallet.
Exchange wallets. These offer more convenience and user-friendly interfaces. However, they have the highest risk of attack. If you choose an exchange wallet, only go with the big players such as Coinbase or Gemini. Exchange wallets can also be accessed through your iPhone, tablet, etc., whenever you want. Many are free. But your information is stored with a third party, so these are less secure.
Top pick: Coinbase.
Mobile wallets. These are app-based wallets designed for your phone. They have the added value of allowing you to pay for something in bitcoin, ether, etc., while shopping. Many wallets in the above categories offer mobile app versions. There’s just the added risk of losing your phone or getting hacked.
Hardware wallets. These are digital storage devices that can be connected to the internet to make transactions. This makes them less susceptible to hacking, but they can be lost or stolen. However, if you lose your hardware wallet, you can buy a new one and recreate the same wallet (and access your coins) with a recovery passphrase.
(Many big crypto investors use these. But they store them in a safe-deposit box, etc.)
Top pick: Ledger Nano S.
Paper wallets. Finally, we get to the paper wallet. These are probably the easiest to use (and one of the cheapest). They are just what they are called — pieces of paper. And your public and private key info is printed on them, typically as a QR code. But they are also easily destroyed by water or fire. And of course, they are easy to lose track of.
For the safest storage, hardware and desktop wallets are some of the best options.
Just make sure you create a recovery passphrase to recreate your wallet if you lose access to it.
No solution is perfect. However, the worst thing you can do is trust your private keys with a small exchange and have the founder disappear with your cryptocurrencies!
Editor, Crypto Profit Trader