Cryptocurrencies such as Bitcoin, Ethereum, Solana or Cardano are becoming increasingly popular among investors. In addition to shares, different cyber currencies are often added to the portfolios. However, anyone who buys Bitcoin and Co. on one of the numerous crypto platforms does not own the coins in purely factual terms. They are still held by the respective exchange, but are held and managed there for the customer. Similar to other valuables that are stored in a safe, cryptocurrencies can also be physically secured – a good way to keep cryptocurrencies safe.
Basically, when a customer buys a coin through a crypto exchange, the exchange holds that coin in custody for the customer. If the exchange goes bankrupt or is hacked, investors face losses in the millions. Negative examples are Bitgrail, Cryptsy or Mt.Gox.
In the crypto world, there is the saying “Not your keys, not your coins”. This means that only those who own the key to their coins have sole and full control over the cryptocurrency. And this is only possible on a private hardware wallet – a so-called cold wallet. Here is an overview of how this works and what alternatives are available.
Store Bitcoin, Ethereum and Co. securely online and offsite – this is how it works
How to store cryptocurrencies securely online
Deposits at crypto exchanges such as Coinbase or Kraken are so-called hot wallets. A hot wallet is connected to the Internet throughout and therefore does not inherently bring the highest possible security, as the provider could fall victim to a hacker attack and third parties could thus gain access to the customers’ coins. The providers are aware of this risk and try to protect their hot wallets from such hacker attacks as best as possible. However, a certain risk always remains.
Advantages of hot wallets:
Hot wallets offer their users a high level of convenience. Since the wallet is connected to the Internet at all times, customers can trade their coins quickly and easily via a variety of devices. Especially those who want to trade regularly can react quickly to current price developments – but should take into account the accruing trading fees of the crypto platforms. The security standard of crypto providers’ hot wallets is already very high. However, a basic risk always remains with this variant.
Disadvantages of hot wallets:
Hot wallets are naturally not the safest form of storing Bitcoin and Co. because they are constantly connected to the Internet. Due to this constant internet connection, hot wallets are popular and primary targets of hackers.
In order to secure the coins, many crypto exchanges offer their customers additional security options to choose from. The crypto platform Coinbase, for example, offers so-called “vaults” for individual cryptocurrencies. Through these vaults, another level of security is built in for users. To set up such a vault, users need a second e-mail address – for example, that of a family member – to legitimize and carry out transactions with the coins held.
If users have created such a vault and deposited the respective cryptocurrency, these coins must first be withdrawn from the vault for transactions before they can be traded. The withdrawal of the coins from the Vault will only be released if the owners of both registered mail addresses agree to the transaction within 48 hours. For this they will be notified by mail. Should a third party now have access to these coins, the registered mail addresses will be informed about a requested debit. They can now cancel this requested debit within 48 hours. Hackers would therefore have to hack both registered mail addresses in addition to the crypto platform in order to access the coins in the vault.
On the one hand, this restricts the possibilities for action, as customers can no longer react to short-term price developments, but on the other hand, the security of the coins held is significantly increased.
Nevertheless, investors should note that even such a vault is only possible via a permanent Internet connection and is therefore not free of dangers. At the same time, the exchanges themselves already offer a very high security standard. For example, the Coinbase website uses AES-256 encryption, a particularly high encryption standard, to protect users’ banking information. In addition, Coinbase secures 98 percent of all digital assets on an offline storage facility.