- Users are leaving centralized exchanges as increased scrutiny highlights issues with reserves.
- Secure ways of storing crypto include self-custodial wallets and regulated crypto custodians.
- There is no one-size-fits-all solution, and different users will have different needs in custody.
The recent collapse of the cryptocurrency exchange FTX was a stark reminder of the vulnerability of these platforms. As one of the world’s leading exchanges, this incident has sent shockwaves throughout the crypto community.
The collapse of FTX aggravated 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 issues with these unregulated, centralized exchanges.
The good news is that alternative ways of storing crypto investments provide better security to users. These range from self-custodial wallets like Trust and Trezor to specialized, regulated custodians like Orbitos.io.
In this guide, we will go over the six alternatives to storing crypto in a centralized exchange and their particular advantages and disadvantages.
1. Hot Storage: Storing Crypto on a Desktop or Mobile Wallet
Hot wallets are probably the most convenient way to store crypto, second only to exchanges. These “hot wallets” are essentially just desktop or mobile apps that store a user’s private keys on their device.
However, they have one crucial difference from exchanges; they allow users to retain custody of their own crypto. Because the user controls the private keys, they don’t have to worry about any third party losing their money.
Hot wallets are an excellent way for users to enjoy convenience while retaining custody of their funds. However, they come with downsides. Hot wallets are more susceptible to hacks and malware attacks. If a hacker gets control of the private keys, they can empty the entire wallet.
While many hot wallets come with security measures like two-factor authentication, encrypted keys, and face recognition, these are imperfect. That is why it is imperative to keep security a priority.
Some popular hot wallets include Trust Wallet, Metamask, and Mycelium. They are free to use and are available for desktop, iOS, or Android.
Hot wallets are ideal for keeping smaller quantities of crypto for day-to-day transactions. Investors with bigger holdings should keep these 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. Typically in the shape of USB flash drives or digital cards, cold wallets allow users to store their private keys online.
Users have to connect these devices to their computers or mobile phones when they want to move their assets. This “cold” offline storage has significant security advantages. These wallets are not connected to the internet, making them virtually hack-proof. That’s why hardware wallets are the preferred solution for long-term storage.
Hardware wallets are also a self-custodial solution, which means that users are in charge of the private keys to their wallets.
However, they also have their own downsides. The first one is that the physical nature of the device limits its usability. Having to plug in a device every time to access the funds can be a tedious process. Moreover, there is potential for theft or loss and damage to the device. If a user loses or misplaces the device, they lose access to assets in their wallet forever.
In addition, cold storage wallets are not free. Popular hardware wallets like Ledger and Trezor go for around $100. That’s why cold storage works best for holding larger sums of crypto for longer periods.
3. Crypto Custody Solutions: Giving Your Keys to a Regulated Custodian
Crypto custody is an increasingly popular way to securely store large amounts of crypto. In fact, for institutions and high-net-worth individuals, that is often the preferred way to store crypto.
Custody solutions allow users to store their crypto with a trusted third-party provider. Crypto custodians are regulated entities with clear mandates regarding what they can do with user funds.
Unlike crypto exchanges, custodians don’t trade with the money they hold. They don’t lend out funds to third parties. Instead, custodians take a small fee for their services from the users. This is important, as it shields the user from the risk of the custodian going bankrupt.
Still, users entrust their crypto with a custodian who must give away their private keys. This is a downside, as users no longer have sole control of their funds. However, institutions and high-net-worth individuals still opt for this option and choose to trust regulated entities.
On the flip side, entrusting crypto with a custodian eliminates the risk of loss or theft of private keys. In addition, it also significantly reduces the risk of hacking.
An example of a regulated crypto custody provider is Orbitos – a Lithuanian company that offers custodial services for institutional clients. They provide storage solutions for clients who want to store their crypto securely and easily.
Ultimately, crypto custody is an excellent choice for organizations and high-net-worth individuals looking to securely store large amounts of crypto.
4. Paper Wallets: Printing Out Private Keys and Addresses
Users that don’t want to pay custodian fees 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 safest ways of storing crypto. They are cold wallets – entirely offline, with no data stored on any device. This makes users’ private keys relatively safe from hackers.
Paper wallets are also easy to use and set up. And they are completely free. All users have to do is print out their keys on a sheet of paper and store them in a safe, secure place.
However, paper wallets come with two major downsides. Firstly, they are not the most convenient solution for day-to-day transactions. Users must manually type out their keys and address whenever they want to move funds.
The other major issue is the risk of losing the paper wallet. If a paper wallet gets damaged or destroyed, users will not be able to get into their wallets. Essentially, this will make their funds lost forever. Luckily, paper wallets can be relatively inconspicuous, so they likely won’t attract much attention from would-be thieves.
This makes paper wallets great for the long-term storage of smaller amounts of crypto. They are not a great way to keep larger holdings, as the risks of loss are just too high.
5. Decentralized Exchanges (DEX): Trading Without a Middleman
For users that want more convenience and flexibility in their crypto storage, decentralized exchanges (DEX) are a great option. DEXs work like exchanges but with one major difference; all of 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 of their private keys.
This makes decentralized exchanges a good alternative to centralized exchanges. However, there are some disadvantages of DEX as well. Firstly, they are not the most beginner-friendly solution. Their user interface is typically more complex than that of centralized exchanges.
Moreover, traders have to understand the specific risks involved with DEXs. Because the DEX space is so new, there are risks with the security and soundness 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 maintains a controlling stake in the governance tokens. That means that they have complete control over the protocol. Moreover, some projects have hidden back doors that give the owner administrative privileges.
Navigating DEX requires a great degree of knowledge and understanding of the DeFi space. Therefore, it’s a good option for the crypto-savvy investor. On the other hand, it might not be the best option for those without intimate knowledge of the space.
6. Multisignature Accounts: Splitting Up Access Across Multiple Parties
Multisignature accounts are wallets that require multiple signatures to access the funds. They are a great way for users to protect their crypto from hackers, as it requires more than one user to check out funds. This ensures that at least two people approve all transactions before they can be executed.
Multisig wallets are also great for teams and businesses. They can use these wallets to set up shared accounts that require multiple-party approval before transactions can be made. This is especially useful in organizations where money needs to be kept secure from rogue actors within the company.
Multisig wallets have some downsides, however. 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 in and out of multisig accounts without going through a third-party service.
Setting up multisig accounts is an excellent way for users to protect their funds and ensure that only authorized individuals can make transactions. However, the complexity of setting them up means that they are not the most beginner-friendly solution.
Overview – How to Pick the Right Option
When it comes to storing crypto, 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 convenient option for storing smaller amounts of crypto short term. Crypto-savvy users can also think about storing their crypto in a decentralized exchange.
On the other hand, users that want to hold smaller amounts of crypto for a long time should probably use hardware wallets like Ledger or Trezor. For minimal amounts of crypto, users can also get away with using paper wallets.
For users and organizations with larger amounts of crypto, multisignature wallets are a great option. Finally, for institutions and high-net-worth individuals that need to store large amounts of crypto securely, crypto custodians like Orbitos.io are a great choice.
There is no one-size-fits-all solution for crypto storage. The best storage solution for a user will depend on the user’s situation. With the different types of wallets available, users can find an option that works best for their needs.