How to Securely Store your Crypto

So you've just used money from your bank account to buy some crypto, and now you own some digital assets; congratulations! Now, you have a list of questions about the safest way to store your assets.

Is it okay to just leave your crypto on the exchange where you made the purchase? If not, where should you store them? Are hot wallets like Metamask safe enough? If not, when should you put your assets into a cold wallet? It can all seem overwhelming at first, but don’t worry, because in a few minutes, you’ll know exactly what to do.

But before we dive into the specifics of securely storing your crypto, we must understand the difference between custodial and non-custodial wallets!

So, here's a breakdown of both types.

Custodial vs. Non-Custodial Wallets

1. Custodial Wallets

Custodial wallets are those where a third party, such as an exchange or a financial institution, holds and manages your private keys. Essentially, you are entrusting your funds to this third party.

Key Features:

• Third-Party Control: The service provider has control over your private keys and, consequently, your funds.
• User Convenience: Often easier for beginners as the service provider handles security and key management.
• Recovery Support: If you forget your password or lose access, the provider can help you recover your account.
• Examples: Popular exchanges like Coinbase, Binance, and Kraken offer custodial wallets.

Pros:

• User-friendly, especially for those new to cryptocurrency.
• Reduces the risk of losing access to funds due to lost private keys.
• Providers often offer additional services like trading, staking, and customer support.

Cons:

• Security risk if the third-party provider is hacked.
• Users do not have full control over their funds.
• Potential for account freezes or restrictions based on the provider’s policies.
• Remember: Not your keys, not your crypto.

2. Non-Custodial Wallets

Non-custodial wallets give users full control over their private keys and, therefore, their assets. Users are solely responsible for the security and management of their cryptocurrency. Seed phrases are usually 12 or 24 words. Non-custodial wallets are sometimes called self-custodial wallets because the user is self-custodying the funds.

Key Features:

• User Control: You retain complete control over your private keys and funds.
• Security Responsibility: Users must ensure the security of their private keys and take measures to protect against loss or theft.
• Privacy: Enhanced privacy as you do not rely on a third party to access your funds.
• Examples: Wallets like MetaMask, Ledger, Trezor, and Trust Wallet are non-custodial.

Pros:

• Full control and ownership of your funds.
• Enhanced privacy and security if managed properly.
• Less risk of censorship or account restrictions.

Cons:

• Higher responsibility for security and key management.
• If you lose your private keys or seed phrase, you lose access to your funds permanently.
• Often less user-friendly for beginners.
• Remember: Never lose or share your private keys or your seed phrase.

Below are examples of private keys, public keys, a wallet address, and a seed phrase.

FAQ

• What is the difference between a custodial and a non-custodial wallet? A custodial wallet is managed by a third-party service provider, such as an exchange, which holds your private keys and manages your funds. A non-custodial wallet, on the other hand, gives you full control over your private keys and your funds. With non-custodial wallets, you are solely responsible for securing your private keys and managing your assets
• Is it safe to leave my cryptocurrency in the exchange where I purchased it? While leaving your cryptocurrency in an exchange might be convenient, it poses several risks. Exchanges can be hacked, leading to the loss of your assets. Exchanges also keep control of your private keys, meaning you don't have full ownership of your funds. For long-term storage and enhanced security, transferring your crypto to a personal wallet is recommended
• Are hot (digital) wallets like MetaMask safe enough for storing my crypto? Hot wallets, such as MetaMask, are non-custodial (also called self-custodial). This means you are given control of your private keys. However, they are still connected to the internet for the convenience of regular transactions and trading. Therefore, they are more vulnerable to hacking compared to cold wallets. For storing large amounts of cryptocurrency or for long-term storage, using a cold wallet (hardware wallet) is a safer option.
• When should I use a cold (physical) wallet? Cold wallets, such as Ledger or Trezor, are best used for storing large amounts of cryptocurrency or for long-term storage. They are not connected to the internet, making them less vulnerable to hacking and other online threats. If you do not need frequent access to your funds and prioritize security, a cold wallet is the ideal choice.
• How can I ensure the security of my non-custodial wallet? To ensure the security of your non-custodial wallet, follow these best practices:
  • Store your private keys and seed phrases securely, preferably offline.
  • Use two-factor authentication (2FA) for an added layer of security.
  • Regularly update your wallet software to protect against vulnerabilities.
  • Consider using a hardware wallet for enhanced security.
  • Avoid sharing your private keys or seed phrases with anyone.

How To Set Up a Hot Wallet (Software wallet/Digital wallet)

Great! Now we understand the difference between custodial and non-custodial crypto wallets, we know that self custody is the safest option, but it also comes with added responsibility.

So let’s see how we can set up the two types of non-custodial crypto wallet, before transferring some crypto from our exchange wallet to our newly set up crypto wallet.

As a reminder:

• Software wallets, or digital wallets can also be non-custodial, whereby you are in control of your own keys.
• Software wallet options like Metamask and Phantom are called hot wallets, because they are accessible directly via your browser.
• Hardware wallets like Trezor, Ledger, and the Lattice 1 by GridPlus are called cold wallets, because they offer added security measures.

Below are step-by-step instructions on how to set up both a hot cold wallet and a cold wallet.

Hot Wallet Setup:

• Install a software wallet app such as MetaMask.
• Visit https://metamask.io/
• Hit "Download" in the menu bar.
• Click “Install MetaMask for Chrome (or your preferred browser). You will then be directed to the Chrome Web Store.

• Click “Add to Chrome”.
• On the pop up, click “Add extension” (see below).

After adding MetaMask Extension, MetaMask will automatically open. You can also make sure it's easily accessible in your toolbar by pinning MetaMask so the icon is always visible when you open the browser.

• Create a new wallet and back up your seed phrase.

Once installed, MetaMask will ask you to create a new wallet. Remember, you are the custodian of this wallet, so you will have to create both a password (to access the account) and a secret recovery phrase (to control and restore the entire wallet). Both must be kept secret and stored securely. Here are some tips.

Once you follow the steps to securely store your secret recovery phrase, your wallet will be created

Remember: The Secret Recovery Phrase is the secret that controls the wallet. If someone has this secret, they have complete access to the wallet. MetaMask does not keep your Secret recovery phrase: you are the custodian of your wallet.

How To Set Up a Cold Wallet (Hardware wallet/Physical wallet)

For today’s example, let’s see how we can set up a new Ledger device. Popular Ledger models are below, but for a full comparison of all Ledger models, please visit the Ledger hardware wallets comparison page.

Step 1: Getting started with your New hardware wallet

Firstly, let’s choose how to set up our device. For first time setups, we will choose “Set up a new device” to generate new private keys and to create new accounts.

Now, visit the official Ledger website to download Ledger Live for your operating system.

Step 2: Device Setup

When a user first receives their Ledger wallet, it must always be initialized by following this process:

1. Powering on the device
2. Generating a pin code
3. Generating 24 words

After powering on your new hardware wallet, you'll choose a 4 to 8-digit PIN code that unlocks your new Ledger device.

Then you must save or restore your 24-word recovery phrase. Use one of the three provided recovery sheets to note down and securely store your 24-word recovery phrase.

Your recovery phrase backs up the private keys that manage your crypto assets. It can be used to restore access to your crypto assets in case you lose access to your device, so do not lose your private keys.

Below is an example of a filled out recovery card, taken from Ledger. This is a dummy account.

Next you will be asked to verify the recovery phrase in the device to ensure you have noted them down correctly.

Once you have verified the recovery phrase you will be prompted to hide it.

Once your Ledger hardware wallet is ready, click on Continue in Ledger Live. This will take you to the next step of setup which is the security checklist and will vary slightly depending on which Ledger model you are setting up.

Once the genuine check is completed, your device is ready to use. You can now transfer funds from your exchange account to your hardware wallet.

Transferring Crypto to Your Wallet

Now, we can transfer funds from our crypto from the exchange account to our newly created hardware wallet.

Step-by-Step Process:

1. Go to the “Send” or “Withdraw” section on your exchange account.
2. Enter your hardware wallet address as recipient.
3. Confirm the amount and initiate the transfer.

Note: It is recommended that you first conduct a test transaction with a tiny amount of funds before sending all your funds across to a new address.