Beginner's guide to investing in crypto: Part five

by , 20 March 2018
Beginner's guide to investing in crypto: Part five
You've decided you want to invest in cryptocurrencies.

You've opened an account with a cryptocurrency exchange.

You've deposited your money and bought some Bitcoin, Ethereum or another cryptocurrency.

Now how do you make sure your cryptos are secure and stored safely?

Well, before I tell you, you need to know that storing cryptos isn't like storing cash. There are no intermediaries to rely on to keep them safe for you. And no recourse if you lose them.

That's why it's important to understand the different ways you can store them and decide which one is right for you. This is what I'm going to do in part five of my beginner's guide to investing in cryptos.

    
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The five types of crypto wallets
 
#1: Exchanges
 
A wallet on an exchange, such as Luno, Ice3x, Bittrex or Binance provides you with the lowest level of security. But you will need to have your cryptos on here at some point because this is where you buy and trade them.
 
The advantages of an exchange are that they’re easy to use. Basically, all you need to create an account is a working email address. And just like email, you can access it anywhere. All you need is internet.
 
In addition, you can buy and sell cryptos instantly. Some exchanges even have apps you can download to make buying and selling even easier and quicker. 
 
But exchanges do come with disadvantages…
 
Exchanges can be hacked. And when they get hacked, you can lose all your crypto. This also means they ultimately have control over your cryptos, and not you.
 
Another disadvantage is that exchanges are constantly targeted by phishing scams. And there are countless people who fall for them.
 
So should you use an exchange?
 
Well, to trade and buy cryptos, you need an exchange. But what you can do is only keep the cryptos you’re actively trading on your exchange wallet and keep the rest in a safer wallet.
 
#2: Web wallets
 
A web wallet is hosted online, and again is created just like an email address. For example, you automatically get a bitcoin wallet when you register with Luno. Then for an ethereum wallet, you just need to activate it.
 
Web wallets and exchanges have the similar advantages in that they’re both easy to use. And you can access from anywhere with internet connection.
 
The only difference is, you have more control with a web wallet than an exchange, because you have a private password and two-factor authentication. In addition, you also can have a private key for additional security.
 
Just like exchanges, web wallets can and do get hacked.
 
But even worse, if the service goes down and you haven’t downloaded your private keys, your cryptos are gone.
 
So should you use a web wallet?
 
If you don’t have much money in cryptos, and want easy access, a web wallet is the ideal option. But make sure you can access your private keys. Download your keys or write them down on paper. If something goes wrong, you can usually recover your cryptos.
 
#3: Desktop or mobile wallet
 
This is simply a program or app that runs on your computer or mobile phone.
 
They give you more control than a web wallet as you have your own copy of the wallet stored on your own computer or phone.
 
But the problem is, they can and do get hacked by malicious software on your computer or phone.
 
In addition, if you lose/break your computer/phone you lose all your cryptos along with it.
 
So should you use one?
 
The main thing to watch out for with these wallets is malicious software. Many people end up losing their cryptos to hackers in this way.
 
Still these wallets are safer than a web wallet because you’re not relying on a third party to secure your cryptos. Again you should write down your private keys when using these wallets in case you need to restore it.
 
         
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#4: Cold wallet
 
People talk about “cold” and “hot” wallets.
 
Simply, hot wallets are connected to the internet. Whilst, a cold wallet is stored on a device that isn’t connected to the internet.
 
So for instance, if you download your wallet file from myetherwallet.com and store it on a USB stick or memory card, this would then be a cold wallet. The USB stick isn’t an internet enabled device.
 
Cold wallets have lots of advantages like…
  • They’re very secure – it can only be hacked if someone gains access to the physical device.
     
  • They’re easy to hide and safely store – you can store them in a safe, just like money or gold.
     
  • They’re easy to copy – just copy the wallet file onto another USB and store it at another location.
     
  • They’re easy to encrypt – you can encrypt the USB stick for an extra layer of protection.
     
  • They’re cheap – you can get a good quality USB stick at many stores for R250-R500. 
One of the major disadvantages of cold wallets is that they’re easy to lose. How many times have you lost a USB?
 
If you do make copies, you must keep tabs on them all.
 
Then, cold wallets are slower to use than a hot wallet, because you need to plug in your USB and load your wallet every time you use it.
 
In addition, you can be hacked because you still need to plug your USB into a computer to use the wallet. If that computer has malicious software, it can then steal the contents of your wallet.
 
So should you use one?
 
If you don’t trade too much, this is a good, secure option. It has much less chance of being hacked than any of the above wallets.
 
It is still hackable though. But because you’re only connecting it to your computer to trade, there’s less chance it will get hacked.
 
#5: Hardware wallet
 
These are a more sophisticated type of cold wallet. They are essentially tiny computers cased inside USB sticks.
 
If you’ve ever heard of Trezor or Ledger, then you’ll know what I’m talking about. They’re the leading companies in this field.
 
Hardware wallets give you all the advantages of a cold wallet or paper wallet, with the speed of a desktop or mobile wallet. They are also much more secure than any of the other types of wallet and very easy to use. But they cost around between R1,500 and R2,000.
 
Your private keys are stored and encrypted on the device. So no one can see them. Even the computer you connect your wallet to when you use it to trade can’t see them. So in theory, hardware wallets cannot be hacked.
 
And if you lose it, or even if someone steals it, it’s not the end of the world.
 
If someone finds your Trezor or Ledger wallet they still need your pin code to use it. After a few wrong attempts they are locked out for years. This means they can’t be cracked by a password cracker.
 
So if you’re fully invested in the crypto market, then a hardware wallet is the best way to keep your cryptos safe.
 
In case you missed out, you can read part one, part two, part three and part four now.
 
Until next time,
Joshua Benton,
 
P.S. We released a special “2018 Crypto Roadmap” in the March issue of the South African Investor detailing the five cryptos to buy and hold in 2018 and one crypto avoid. Do yourself a favour and read every word. It could be your best chance to make life-changing money from the booming crypto market. 
 


Beginner's guide to investing in crypto: Part five
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