If you’re investing in cryptocurrencies, you actually need to be able to access your assets in order to trade them.
To that end, you can either store your crypto on your computer in a wallet or use a cryptocurrency exchange. If you’re new to the world of crypto, here’s what that means:
- A wallet is software (or specialized hardware) that stores your private keys. The wallet engages with the blockchain, providing your private key to enable transactions.
- A cryptocurrency exchange does the same thing, but your private keys are not held on your computer. Instead, a service controls your keys — and the assets associated with those keys. As the name implies, exchanges also provide an easy way to send and receive tokens.
So, which option is better? In our opinion, wallets are far more secure and reliable. Here’s why.
Cryptocurrency exchanges are vulnerable to attacks and human error.
The primary draw of cryptocurrency exchanges is their convenience. Popular platforms like Coinbase enable users to send and receive tokens with a few clicks — and sell assets instantly.
Crypto wallets generally don’t offer this option. To send your token, you need to find a buyer. That’s not especially difficult, but it’s an extra step in the process. Overall, cryptocurrency exchanges provide a simpler way to engage with crypto, which makes them popular with less tech-savvy investors.
But if you’re using a service, you’re trusting that organization to handle your private keys. Their systems may be prone to malware, or they might mishandle your assets (as FTX investors learned in November 2022).
Simply put, cryptocurrency exchanges rely on systems that are out of your direct control. If you have a large number of valuable assets, you’re taking a risk.
And while banks have a legal responsibility to insure their customers’ funds, that’s not the case for crypto. The Federal Deposit Insurance Corporation (FDIC) does not currently offer deposit insurance for crypto exchanges, so if your exchange loses — or steals — your assets, you may have trouble getting those tokens back.
Hardware wallets are also susceptible to failure, but you can take steps to safeguard your tokens.
This is not to say that crypto wallets are perfect. Older wallets required users to download the entire blockchain, which took up an enormous amount of storage space. That’s no longer the case: “Light” wallets, which do not sync the full blockchain, are also available, and many are exceptionally secure.
Cryptocurrency wallets can also lose tokens due to poor data management practices:
- Regular data backup is essential. If you only have a single copy of your private keys, a hard drive failure or other data loss event can put your assets at risk.
- Software wallets may be vulnerable to attack. Malicious actors understand the value of crypto and may seek out wallet files.
- If you forget your wallet’s password, you must have your recovery phrase (also called a seed phrase) to restore access. Otherwise, you’ll need help from a talented cryptocurrency recovery service.
- You might accidentally delete your wallet file or throw your hard drive in a landfill. If that occurs, you’ll need to build an army of robot dogs to get it back (and no, we’re not making that up).
You can avoid these issues by taking basic precautions. The safest approach is to keep a “cold” wallet — a wallet that isn’t connected to any network — to minimize the chances of a malicious attack.
However, overthinking security can create bigger issues. The best practice: Choose a secure password and write it down (on paper).
Most importantly, remember to back up all important data. Keep at least three copies of your wallet and recovery keys, including one off-site copy. We generally recommend cloud storage services for the off-site data, but since crypto tokens are valuable assets, you might want to avoid cloud storage for optimal security.
Finally, if you do decide to use a cryptocurrency exchange, do your research. Make sure that the provider has strong customer service, and read the fine print before signing your user agreement. Of course, due diligence may not matter: FTX was one of the world’s leading exchanges before its catastrophic collapse.
Protect your digital assets — but don’t panic if you make a mistake.
If you’ve lost access to your cryptocurrency, we’re here to help. As leaders in crypto recovery, we operate full-service laboratories with certified cleanrooms, and we support all storage media formats and crypto assets. All of our services feature a no data, no charge guarantee: If we can’t restore your tokens, you don’t pay for the attempt.
Call Datarecovery.com at 1-800-237-4200 or submit a case online to connect with our engineers.