Bitcoin and crypto use is growing the most in lower and middle-income countries; it is used for investing, sending remittances, preserving savings, and acting as a substitute when financial services are hard to access.
Many products and services have been introduced which make it more convenient for those who use or are new to crypto; however, the increased rate of adoption and use has led to an increase in hacks and thefts. In its annual analysis of cryptocurrency theft, blockchain analysts at Chainalysis found that 2022 was the worst yet in terms of the total value of crypto stolen—$3.8 billion. However, in 2023, theft decreased to $1.7 billion, but the number of hacks increased.
So, it pays to understand how to safely store your cryptocurrency because no storage method is 100% secure. Here are the types of cryptocurrency storage available.
Key Takeaways
- Users can lose bitcoin and other cryptocurrency tokens due to theft, computer failure, loss of access keys, and more.
- Cold storage (or offline wallets) is one of the safest methods for holding bitcoin, as these wallets are not accessible via the internet, but hot wallets are still convenient for some users.
- Those interested in the safest storage should consider using a non-custodial cold hardware wallet for all of their long-term bitcoin and cryptocurrency storage.
- Only keep what you plan to use in your hot wallet. Once you're done with your transaction, move your crypto back to cold storage.
Bitcoin Storage
When you purchase bitcoin, you're given ownership of the amount you bought. You're given two keys—one is your public key, the other is private. The public key is used to encrypt information and is your wallet address, and the private key allows you to decrypt the information, or access your bitcoin. This is the key you're storing and safeguarding.
Your bitcoin ownership is safely recorded, stored, validated, and encrypted on the blockchain. To date, there are no known events where cryptocurrency has been stolen by altering the information on a blockchain because of the encryption methods used. With current technology, it would take centuries, if not millennia, to brute force hack a blockchain.
However, the wallet you use stores your private key, and wallets are generally software on a hardware device, which makes it hackable—thus, the weak link lies between the blockchain and the user.
Anything that allows you to access your bitcoin, such as third-party apps like wallets or anything else that stores or enters your keys for you, is susceptible to hacking.
Types of Storage
There are generally two categories of storage, custodial and non-custodial, and four types of wallets—desktop, mobile, hardware, and web-based:
- Desktop wallet: A program that resides on your computer. Not the safest storage method.
- Mobile: A program that is hosted on a mobile device. Not very secure.
- Hardware: A device similar to a USB drive. Secure, depending on if it is connected and how it connects to another device.
- Web-based: A wallet that is hosted by a web service. Not secure, as you're letting someone else store your keys for you.
Whether a wallet is connected to or resides on the internet determines whether it is a hot or cold wallet.
Using a top-rated Bitcoin wallet with cold storage abilities can help increase your Bitcoin and crypto security.
Custodial Wallet
A custodial wallet is managed by a third party, such as an exchange like Coinbase. In this arrangement, the custodian stores your private keys for you, guaranteeing their safety and sometimes providing insurance on holdings up to a certain amount. Custodial wallets like these have been the target of many attacks since users began using their services; exchanges have taken measures to harden their services, such as moving users' keys into enterprise-level secure data storage so that they cannot be accessed.
Custodial wallets can either be hot or cold.
Non-Custodial Wallets
Non-custodial wallets are those you use to store your keys with no one else involved. Non-custodial wallets can also be either hot or cold.
Hot Wallet
Hot wallets are software that store your keys and have connections to the internet. These wallets create vulnerability because they generate the private keys needed to access crypto. While a hot wallet is how most users access and make transactions in bitcoin, they are vulnerable and can be hacked.
It's estimated that about 17% of the bitcoin that will ever be in circulation has been lost—as in misplaced, keys forgotten, and so on.
Cold Wallet
A cold wallet (also called cold storage) is a wallet that is not connected to the internet; therefore, it holds far less risk of being compromised. These wallets are also called offline wallets or hardware wallets.
The Safest Bitcoin Storage
Of all the options available to you for storing your keys and securing your bitcoin, the safest methods will always be those you manage yourself without a connection to the Internet.
Commercial Non-Custodial Cold Wallets
You'll find many options available, such as the Ledger Nano X or Trezor Model T. These are usually USB connection-type drives that connect to your device. When used with safety in mind, these commercial storage methods are safer than storing your keys in the wallet on your connected device.
Many of these wallets store your private key and come with software that works in parallel to your wallet device or program. This allows you to view and use your holdings without needing to enter your private keys.
It's important to know that many of these devices advertise compatibility with DeFi applications. Chainalysis found that DeFi protocols accounted for the most cryptocurrency hacking activity in 2021, 2022, and 2023.
When choosing one of these products, you might find some with Bluetooth or other wireless options. These are also relatively safe if you can disable the connectivity after using them if they don't automatically do so. The vulnerabilities of these wallets are the software and connections used on your device or storage media, and the fact that you have to connect them to a device that has a connection to use them.
Commercial cold wallets are also called hardware wallets.
Alternative Non-Custodial Cold Wallets
There are several methods that are safe from hackers and thieves you can use to secure your bitcoin keys. USB drives can be used just as effectively as a commercial wallet if you encrypt and safeguard them. Disconnect them when they're not being used, store them in a secure place, make a backup, and only use them in one device for one purpose—keeping your keys.
One of the original ways to store keys was to write them down on paper and place it in a safe. This is still a secure method; however, ink can bleed, paper can deteriorate over time or be lost, or someone can steal it. If you choose this method, you should make sure only trusted people have access to the safe and check on the paper periodically.
In the past, some users used QR code generators, printed the keys and QR codes on paper, and then stored them in safes. This can still be done, but you're allowing additional software access to your keys. Also, don't use websites that will generate codes or anything for you—you never know how your information is being stored and used on a website, and they are notorious for being hacked or hijacked.
Security Precautions
Backup
Back up your entire bitcoin wallet early and often. In case of a computer failure,a history of regular backups may be the only way to recover the currency in the digital wallet. Make sure to include all the wallet.dat files and then store the backup at multiple secure locations (like on a USB, CD, or another removable device). Additionally, ensure you use a strong password on the backup and encrypt it.
Software Updates
Keep your software up to date. A wallet running on non-updated software can be a soft target for hackers. The latest version of wallet software will have updated definitions and fixes in place, thereby increasing the safety of your bitcoins. Consistently update your mobile device or computer operating systems and software to make your bitcoins safer.
Multi-Signature
The concept of a multi-signature (multi-sig) has gained some popularity; it involves transaction approval from several people(like three to five) for it to take place. This limits the threat of theft as a single controller or server cannot carry out the transactions (i.e., sending bitcoins to an address or withdrawing bitcoins). The people who can transact are decided in the beginning—when one of them wants to spend or send bitcoins, they require others in the group to approve the transaction. This is also called a shared wallet and should be used with caution.
If you have the option of using multi-sig, ensure you know the other people and trust them before joining the wallet.
Seed Phrases
Seed phrases are a series of randomly generated words that act like a master password for your wallet—it's also called a recovery phrase, mnemonic phrase, or mnemonic seed phrase. These phrases allow you to recover your keys if you ever lose your storage devices or your access. Your keys are encrypted and a series of words are generated from that encryption that gives you access to your wallet.
A seed phrase might look like this:
spare snake rather window lab bless night west industry trap jacket absurd detect inspire need robot lift elevator able volcano one memory link goat
These words are easier to memorize and/or write down and store than the 64-digit hexadecimal keys. You can even purchase a titanium stamping kit to preserve and secure your seed phrase in your safe.
Using Your Bitcoin
When you decide it's time to use your bitcoin, the best way to do so is to transfer only the amount you want to use from cold storage to your hot wallet. Once you're done, move any remaining bitcoin back into cold storage.
Your hot wallet's public address can be seen by anyone, as can the amount you have stored in it. You can see an example of this using a blockchain explorer for the crypto you use. Large amounts draw the attention of thieves because it is easier and faster for them to steal from one large piggy bank than several small ones. If you have a decent amount of bitcoin and store your keys in your connected wallet, you become a target.
So, you might be a target if you have bitcoin, but if you don't have anything in your wallet, it can't be stolen.
Is It Worth Buying a Cold Wallet?
A commercial non-custodial cold wallet is one of the safest methods for storing your keys. Considering you may be able to purchase one for about $200 to secure a token worth far more than that, they can be worth it.
Can You Lose a Cold Wallet?
Yes. Examples of cold storage might be a piece of paper you've written your keys on, a device no bigger than a USB thumb drive, or one that resembles a small cell phone. These are easily misplaced, so if you have one, ensure you develop the habit of securing them in the same place every time you use them.
Can Cold Wallets Be Hacked?
Cold wallets, by definition, are not connected to the internet or another device, so they cannot be hacked. When you connect them to a device, they become vulnerable.
The Bottom Line
Cryptocurrency is not losing popularity with users or thieves. Because of those who would rather steal from others than earn a living, it is necessary to store your bitcoin keys as safely as possible. Cold storage methods are the safest way to store your keys, but at some point, you will have to connect your storage device or enter your keys to use your bitcoin. Connecting your storage wallet to an online device only when you need to access and use your keys and then storing the device in a safe place are the best ways to prevent hackers from stealing your crypto.
The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read ourwarranty and liability disclaimerfor more info. As of the date this article was written, the author does not own cryptocurrency.
