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Crypto 101 - Digital Wallets

Question

I’m just getting started with cryptocurrency and trying to understand where the best place is to store them.

Answer

This question was answered on April 28, 2022. Much of the information contained herein may have changed since posting.

Cryptocurrencies, such as Bitcoin and Ethereum, are digital assets which are generally bought, sold, traded and stored in some form of a digital wallet.

Cryptocurrencies use encryption for security and executing transactions and are controlled by private keys that are associated with them.

These ‘keys’ are actually what get stored in your wallet, which is what allows you to determine what happens with those assets.

If these keys are ever lost or stolen, your ability to do anything with your cryptocurrency is in peril, so understanding the pros and cons of the various options is important.

In general, you can store them on a piece of hardware you own or store them online through what is known as a ‘custodial wallet’.

Custodial wallets are where your crypto keys are held by a third party (the custodian) usually associated with an exchange so they can execute transactions for you.

For those just getting started, the custodial wallet approach through popular exchanges such as Coinbase and Crypto.com generally make a lot of sense.

Storing your own keys on a device that isn’t connected to the internet (a.k.a. a ‘cold wallet’) is certainly more secure, but for those just getting started, it adds a lot of complexity.  Many of the exchanges store the majority of your stake in a cold wallet as well.

If you’re responsible for managing you own digital keys and make a mistake, it can be disastrous.

My recommendation is to start with a very small amount of money – an amount you are willing to lose - with a user-friendly exchange that will manage the storage of your keys so you can begin your journey in the cryptocurrency world without a huge learning curve.

As with most technologies, the more secure it is, the less user-friendly it is, so your aptitude for gaining knowledge is the determining factor for your best course of action.

Choosing an Exchange
A big part of choosing a cryptocurrency exchange will be based on what you plan to do.  If you’re looking to buy and hold with an occasional trade, the associated fees may not be that important, but if you want to be an active trader, they become a vital consideration.

Another consideration will be which cryptocurrencies the exchange allows you to trade in if you plan to go the active trader route.

If you’re a new user, the app for the exchange may be a huge consideration from a usability standpoint. Take some time to look at the reviews of the app to see if there are any recurring issues or complaints.

There are nearly 400 cryptocurrency exchanges as of this writing as well as fraudulent ones popping up on a regular basis, so do some homework.

Make sure there is a physical address associated with the exchange that you can verify exists and look into how they secure your assets since they are operating online.

An excellent article that provides details on some of the more popular exchanges is posted on Time.com at: https://bit.ly/3krFRTi

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Posted by Ken of Data Doctors on April 28, 2022