You can be the best crypto investor in the world, but if your crypto gets stolen or lost, you’ll lose every last scrap. So it’s important to safeguard your crypto as best you can. There’s a popular saying in crypto: “not your keys, not your coins” – meaning that if you don’t hold your own private keys, you can’t really be in control of your own funds.
Whether you hold your keys depends on what kind of wallet you store them in. So let’s look into the different types of wallets, keys, and the pros and cons of holding your own keys versus storing them elsewhere.
Crypto wallets and keys
You use crypto wallets to store your crypto keys. There are two main types of wallets:
- Custodial wallets: where the wallet provider holds the keys to your crypto.
- Non-custodial wallets: where only you have access to your keys.
Your keys are what lets you access your funds and transact on the blockchain. There are two kinds of keys:
- Public key: a random string of characters that’s a bit like an email address – you need it to receive crypto from other wallets.
- Private key: a second string of characters that’s like your email password – you need it to send crypto to other wallets.
The private key is very important, as without this key you can’t send your crypto to another wallet, or use your funds in any way.
Storing your keys on crypto exchanges
Crypto exchanges are custodial wallets. When you leave crypto on a centralized exchange like Binance or Coinbase, they’re responsible for safeguarding your keys.
A benefit of storing your keys on crypto exchanges is convenience. If you’re actively trading crypto with different strategies, keeping some of it on an exchange can save you time and hassle. If you’re doing this, you’ll need to make sure the exchange is reputable by doing some due diligence. It’s also a good idea to use more than one exchange to spread your risk in case any of them have any issues.
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Limitations of crypto exchanges
There’s always the chance that any crypto exchange could be hacked – but if you’ve done your research, hopefully you’ve chosen wisely and picked a reputable, secure exchange. But even if your chosen exchange is fully armored up, they still technically own your keys. This means they have the ultimate access to your crypto on the blockchain – that might not be such a good thing.
For example, Coinbase is known to be one of the most secure crypto exchanges out there. But because it’s a publicly listed company, it had to make a new disclosure in case the company ever goes bankrupt – saying it might have to treat customer coins as company debt to fend off starving creditors.
Should you hold your own private keys?
If you’re buying and holding crypto for a longer time, you’re better off using a non-custodial wallet, a.k.a an offline “cold” wallet. This way, you hold the keys yourself, so you’ll always have control over your crypto and access to your own funds. The most basic way of doing this would be to have a paper wallet – where you write down the keys on a piece of paper, laminate it, and guard it with your life.
An even better cold storage solution might be to use a hardware wallet, where you can secure all your coins, tokens and NFTs in one device. These are just as safe as paper wallets, but also allow you to back up your keys. So if you lose your wallet, you’ll still be able to retrieve your crypto.
This guide was produced by Finimize in partnership with Ledger.
Check out Ledger’s mini-website at finimize.com.
