Ok, so after reading about it all year long and hearing tales of easy wealth and the future possibilities of the blockchain, DAOs and NFTs, you’ve finally plucked up the courage to buy some crypto. Congratulations.
But investing in crypto isn’t quite the same as buying your stocks through Sharesies or Hatch. If anything were to happen to Sharesies – the platform – for example, your money should still be safe as it’s held separately in a company called Sharesies Nominee Limited.
Similarly, Hatch is underwritten by American banking giant Citibank.
In both instances your money and shares are held separately to the money used in the operation of the business.
It’s important to remember that that is not always the case with crypto exchanges and choosing a reputable, stable exchange is your first step toward crypto success (more on this below.)
Depending on the value of your investment the next decision you’ll need to make is where to keep it.
If you’re just dipping your toes into digital assets like bitcoin, solana or ethereum and your investment is low you’ll likely be happy with your assets being held by whatever exchange you’re signed up to – popular crypto exchanges/brokers with New Zealand users include Swyftx – which I write about here.
Most exchanges, like Swyftx, have a wallet integrated with your account to make all the processes you’re using on the platform simpler – here you can check the percentage return on your digital assets and get up to the minute values of all coins the platform trades in. These exchange platforms use a blend of cold and hot wallet storage in order to protect your assets, but using an exchange wallet does carry risks.
Another popular broker in NZ, Easy Crypto, doesn’t store clients’ crypto on its platform so having some kind of external wallet is vital. Similarly, NZ cryptocurrency retailer Bitprime doesn’t keep customer coins in its wallet.
Just remember – not all wallets are created equal – different types suit different users.
Here I look at some ways to ensure your crypto stays safe and secure, whatever type of wallet you choose.
Hot wallets
There are many types of hot wallets but one thing they share is that they’re all connected to the internet.
The most frequently used hot wallets are those found on cryptocurrency exchanges.
This means your exchange holds the private keys to your crypto and, while this is fine if your investments aren’t large, hosted wallets like this aren’t as secure as other options; exchanges can be hacked or, in some cases, simply disappear overnight.
The upside is they’re convenient and you can trade or sell straight from your computer or phone and can check on your investments gains or losses regularly and trade between coins easily.
But the real message here is – choose your exchange carefully. If a platform’s hacked and you’ve stored your crypto on the platform – you’re pretty much on your own; cast your mind back to the 2019 $24 million hack of Christchurch cryptocurrency platform Cryptopia, little of which was ever recovered.
Similarly, Australian exchange ACX went belly up this year with investors losing more than $10 million AUD.
A good exchange will offer a range of security options – including two-factor authentication – and 24/7 – or close to it – customer support. Do check that the platform is licensed in New Zealand as a registered Financial Services Provider. Also look at online reviews, the developer team, their twitter account and feedback from sites like Reddit or Telegram, before you sign up, just don’t take everything you see there at face value (crypto Twitter especially, is a place full of scams and pump and dump schemes.)
Check too whether the exchange has had a lot of support from the investment community.
One benefit of keeping your crypto in a hosted wallet is that if you forget your password, you won’t lose your crypto and you can easily trade assets or withdraw or deposit fiat funds from your phone or computer.
Other types of hot wallets, not related to your exchange wallet, include desktop or mobile wallets. There are desktop crypto wallets for Linux, Mac, and Windows — with some supporting all three versions.
Good hot wallets will be password protected and have a recovery phrase so that you can “regenerate” your crypto wallet should your device be stolen or destroyed. These can make it easy to transfer crypto back to an exchange to do more trades or cash out, and are more secure than keeping your coins in your exchange account. Plus, many are free.
Exodus is one of the leading software or “hot” wallets and is supported on both iOS and Android, and on desktop for M1 Macs.
However if your investment in crypto is substantial you’ll be looking at storing it in a cold wallet – as one writer put it – “Putting a large sum of money on a hot wallet is the same thing as going around with huge amounts of cash in your pocket or briefcase.”
Don’t do it.
Cold wallets
A cold wallet is one not connected to the internet and one which holds your private key.
“Not your keys, not your coins” is a saying in the crypto community and a cold wallet puts those keys in your hands, and essentially means that you are your own bank. That’s great but it also comes with added responsibility; lose those keys and you’re in trouble.
The most popular cold wallet hardware brands are Trezor and Ledger – USB like devices that retail for anything from $150 – $250 NZD – that allow you to perform all your crypto operations when connected to your computer or phone, without ever letting your private key “out” on the internet or on your device.
This makes it a lot more secure. Even when a hardware wallet is plugged into your computer the signing of transactions is done “in-device,” and only subsequently broadcast to the network via your computer’s internet connection.
The downside is that cold wallets are slow and less convenient, but they remain the best for long-term storage and is the smart choice for those who hold a lot of crypto – (many use a combination of hot and cold wallets – keeping some crypto in their exchange’s hot wallet to use for trading.)
Even if you lose your cold wallet USB device you can still recover your assets using the 12,18 or 24 word recovery seed which you set up when you install the wallet. But, if you lose that recovery seed your crypto is gone, gone, gone – so it is essential that you store this phrase securely offline. Don’t write it down in notes or email – the recommended way is to use a stainless steel recovery seed backup device – but some prefer to write it on a piece of paper and store this in a safety deposit box or similarly secure location.
Crypto is volatile enough so having some confidence over the storage of your assets – whatever sort of wallet you ultimately go for – will ensure your crypto ups and downs are market and not hacker related.
