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Storing and Securing Cryptocurrencies

Traders Magazine Online News, December 21, 2018

John D'Antona Jr.

For many, certain concepts about how cryptocurrencies work and serve as a means for exchange or investment can be difficult to grasp. One of these concepts is how digital assets are stored and managed. As you might expect, it is quite different from the way you currently manage traditional cash or investments. Here are a few things to keep in mind when it comes to crypto storage and security.

Two Types of Keys

First, it is important to remember that your cryptocurrency is represented by a public key and a private key. Think of a public key like you would an email address—this identifies cryptocurrencies you receive and you can use it to send or transfer cryptocurrencies to another individual. A private key is the secret key—an alphanumeric code—that represents your personal way, such as a password, to access your cryptocurrency. Managing your private key is an essential component of storing your cryptocurrencies.

New Security Challenges

To store and transfer cryptocurrency, and its associated private keys, you can use a number of different methods including mobile applications, third-party online services, specialized hardware—even printing your keys (i.e. the alphanumeric code) on a piece of paper. However, because cryptocurrency is, in essence, a piece of computer code, it is vulnerable to hackers, destruction or accidental loss.

Keeping cryptocurrencies safe involves a different set of challenges than keeping your cash assets, stocks or bonds secure. And crucially, because many cryptocurrencies are not recognized legally in the same way that cash assets are recognized by governments, the same safety nets, such as FDIC coverage for bank assets and legal remedies for damages and restitution, may not be available if your cryptocurrencies are stolen, lost or destroyed. Therefore, it is important to learn about the different ways to store cryptocurrencies.

Cold Storage Versus Hot Storage

There are two general methods for storing cryptocurrencies, often referred to as "cold" storage and "hot" storage.

Cold Storage refers to holding your private keys in an environment that is not connected to the Internet. Examples include storing keys on disconnected hard drives, printing or writing them on a piece of paper or storing them on USB drives. You can also use a "hardware wallet," a type of device similar to a USB drive that lets you store your private keys.

While these storage methods tend to prevent your cryptocurrencies from being hacked by a malicious actor, they are vulnerable in other ways. Hardware, such as hard drives and USB devices, can break down, be lost or suffer functionality defects. Paper can be destroyed or burned, and hardware wallets are not immune from hacking. Finally, thieves can steal hardware, paper and other physical means of storage.

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