Most investors recognize that crypto assets don’t have the same protections as conventional financial assets. For example, a long-term Bitcoin holder recently lost 1,400 BTC worth about $16 million after installing a malicious wallet update. It’s hard to imagine a scenario where a brokerage app update causes an investor to lose millions of dollars’ worth of stock.
Let’s take a look at how to store crypto to avoid these risks and ensure that your assets are safe from malicious attackers.
Crypto Wallets & Exchanges
Cryptocurrencies are little more than a public key required to receive payments and a private key required to send them. While online wallets and exchanges make it easy to transact, they involve storing private keys on potentially vulnerable third-party servers, especially given that most crypto-related thefts are inherently irreversible.
Storing private keys on pen-and-paper or hardware wallets may seem like a safer alternative, but the irreversible nature of crypto also means that lost private keys cannot be recovered. There’s also a chance that a software or hardware wallet experiences a malfunction, or a paper wallet burns up in a fire or becomes illegible after several years in storage.
Investors should carefully consider the pros and cons associated with each crypto storage method and ensure that they take the right security precautions to ensure that their assets are safe from theft or loss. Fortunately, modern exchanges and hardware wallets have made the process easier than ever, and there are some alternatives to consider as well.
Choosing the Right Exchange
Most investors hold conventional financial assets in brokerage accounts, and similarly, they hold crypto assets in online exchanges. Unlike brokerages, these exchanges aren’t held to the same regulatory standards and there have been several high-profile thefts that have resulted in substantial losses for individuals with assets on the exchanges.
The best way to avoid problems is to carefully select an exchange:
- Security: What security measures does the exchange have in place? Do they support multi-factor authentication? Have they been breached in the past?
- Oversight: Does the exchange fall under any regulatory oversight? Have they experienced any issues with regulators in the past?
- Insurance: Does the exchange have insurance against losses? What do these insurance policies cover on behalf of crypto investors?
In addition to selecting a secure exchange, investors should take precautions to ensure that their account is secure from theft. Multi-factor authentication is one of the best ways to avoid theft—and hardware keys are among the most secure forms of MFA. Investors should also ensure that their computers are secure with anti-virus and anti-malware software.
Holding Long-term Assets Offline
The safest way to hold crypto assets is in so-called cold storage—or offline. While the cryptocurrency isn’t as easy to access, the offline nature makes it impossible for hackers to remotely steal from the accounts. The biggest risks are losing the offline storage device or forgetting the credentials required to unlock the device.
Trezor and Ledger Wallets - Source: Exodus Wallet
The most popular offline storage options include:
- Ledger: Ledger provides hardware wallets that have Bluetooth enabled to connect with iOS devices. Since all transactions are signed with the hardware device, it acts as a hardware security key, providing the best of both worlds.
- TREZOR: TREZOR was the original hardware wallet and tends to cater to more advanced crypto users. In addition to cold storage, TREZOR devices can be connected to a computer to easily facilitate transfers.
- KeepKey: KeepKey is a relatively new manufacturer that provides an easy-to-use web-based interface for consolidating a number of crypto tools into one beautiful interface that’s secured with a hardware key.
Investors should ensure that they keep crypto wallets in a safe location, such as a bank safe deposit box or a personal vault. In addition, it may be a good idea to keep a paper version of the PIN to access a hardware wallet in a separate secure location—even if you have the number memorized in case you are incapacitated, and a family member needs to access it.
Alternatives to Consider
Many investors don’t want to worry about storing crypto assets, and moreover, may want to keep all of their investments in the same location. If that’s the case, crypto exchange-traded funds (ETFs) may be the best option since they can be bought and sold like a stock and the fund manager is responsible for holding and securing the underlying crypto assets.
There are a few options (and more coming soon):
- Grayscale Bitcoin Investment Trust (GBTC)
- Grayscale Digital Large Cap Fund (GDLC)
- Bitwise 10 Private Index Fund (Private)
Grayscale Fund Return Differences - Source: Grayscale
When deciding on a crypto fund, investors should carefully consider the expense ratio (or management fees) and any differences between the net asset value (e.g. value of the crypto assets) and the market price (e.g. the amount investors are paying). Liquidity may also be a concern to ensure that the investment is easy to buy and sell over time.
The Bottom Line
Many investors are interested in exposure to the crypto markets but storing cryptocurrencies can be a challenge. When deciding on the best options, investors should consider their liquidity requirements, security measures and other factors. It’s equally important to avoid social engineering attacks that circumvent technical security measures.
Crypto investors should also keep in mind the tax implications associated with a storage medium. For instance, many crypto exchanges automatically generate tax forms that simplify tax season whereas most wallets don’t have these capabilities. Crypto funds may be attractive since capital gains or losses are treated like a stock or fund rather than like a cryptocurrency.
If you’re investing in crypto assets, ZenLedger can help you track capital gains and losses to ensure that you’re accurately filling out taxes each year. You can quickly aggregate transactions across wallets and exchanges, and prepopulate popular IRS forms, as well as spot tax loss harvesting opportunities that can save you money come tax time.