One of the main things that puts people off purchasing cryptocurrency is knowing how to store it safely. So here’s a quick guide on the basics of crypto security.
Security and liquidity
In terms of your assets there are two main considerations: liquidity and security. The liquidity of your assets is a measure of how quickly you can turn the assets can be converted into other goods and services. The security of your assets are also important. You need to be confident that your assets will remain safe if you’re not actively keeping guard over them. The need to consider liquidity and security is no different in the case of cryptocurrency.
Houses versus cash
There is a correlation between liquidity and additional security. Generally, the more secure an asset, then the less liquid. Take for example a house. You might own a house worth a quarter of a million dollars.
In terms of security of your asset, it’s very difficult for anyone to steal your property. How would they even do that?! Even if you went on a tour around the world you can safely expect the house to still be there. As such, property is said to provide very good security for your assets.
However, in order to spend the $250,000 you need to sell the property. This can take time, anywhere between one to twelve months depending on demand. With greater security there is a decline in liquidity.
Conversely, if you had $250,000 in cash sat on the coffee table inside your house then the situation might be a little different. Whilst $250,000 is extremely liquid and can be immediately spent on goods and services, it isn’t the most secure of assets. A determined criminal could easily break into your house and steal your money.
On the other hand, you might argue that you could put your money into a bank. Whilst this would provide greater security over your assets, note that the liquidity has declined. You may now need to communicate with the bank in order to access your funds
Easy access wallets
Cryptocurrency security begins with the wallet that you have chosen. We have mentioned in previous articles the different types of cryptocurrency wallets. The wallet stores the private keys that provide access to your cryptocurrency.
Wallets that are stored in software on devices connected to the internet or directly online are perfect in terms of trading your cryptocurrency. In order to trade your cryptocurrency you will need immediate access. Online wallets and software connected to the internet provide this liquidity. As such, you are able to trade and transact with your cryptocurrency quickly.
Unfortunately, having greater access to cryptocurrency drastically reduces the level of security. A determined hacker could quickly gain access to your cryptocurrency stored in an online wallet, much like the criminal stealing the cash on your coffee table. A more secure solution for holding large quantities of cryptocurrency over the long term might be either the paper wallet or a hardware solution.
The most secure ways to store your cryptocurrency is offline. Without a connection to the internet a would-be hacker could not begin to consider gaining access to your cryptocurrency. It’s the equivalent of putting your house on its own private island that only you know where it is.
This paper wallet creates a code (and a QR code) that is required in order to access your coins. Ideally, the code should be store in a physical safe for double protection. The added security does mean that it will take longer to use your cryptocurrency. There is also a risk as someone may get hold of the paper with the code on and use it for themselves.
A better solution is to store your cryptocurrency on a piece of hardware with in-built security and offline. Generally, the hardware works by storing the private keys on a computer chip. These chips are generally as secure as those used by some of the world’s largest banks. In order to access your coins the hardware is plugged directly into your computer.
In most hardware wallets addition security is generally provided via the use of two factor authentication or even multi factor authentication. Effectively, this requires several pieces of information from several sources to be provided in order to gain access. For example, you may require a password and an access code sent to a mobile phone.
The message should be fairly clear. If you’re storing any cryptocurrency for the long term or have a large amount, use the more secure paper or hardware wallets.