Protect Your Cryptocurrency With a Hardware Wallet
Owners of cryptocurrency such as Bitcoin (BTC) or Ethereum (ETH) are actually at risk of losing all of their invested money if they store all of their tokens on an exchange like Coinbase or Binance. There is a way to 100% protect yourself against these losses though. You need to use a crypto hardware wallet so you can put your coins into cold storage.
By using a hardware wallet, you’re taking full ownership of your Bitcoin and other crypto. When your money sits on an exchange, they technically own your coins. There are multiple possible ways that this can result in a full loss, so you really need to take some precautions before it’s too late. This is something you need to be proactive with, since you won’t be able to recover your funds after something bad happens.
Crypto Exchange Risks
With the current crypto winter of 2022, one of the biggest risks of keeping your Bitcoin on an exchange or staked with a lender is getting highlighted. Since they hold possession of your tokens and cash in your account, you can lose access to them instantly if the company files for bankruptcy or ceases operations. BlockFi and Voyager Digital have already been bailed out by FTX. Three Arrows Capital, a crypto trading firm in Singapore, has basically gone belly-up after a bad bet on the Luna crypto. Lender Celsius, OpenSea, and many other companies in the crypto space are facing insolvency and/or potential lawsuits.
There are actually over 600 crypto exchanges. A few of them are big players, like Coinbase, FTX and Binance. Even these big players have been suffering during the crypto winter, so you can be very confident that the small companies are struggling or possibly going bankrupt. Byu keeping a lot of money and/or tokens on those exchanges, you’re risking a major loss if something happens with the company. Even Coinbase CEO Brian Armstrong has admitted that if they were to file for bankruptcy that it would tie up crypto held in users’ accounts in court proceedings. Your coins could actually be liquidated to pay off creditor debts for those companies before you’re allow to recoup anything.
You also risk loss from hackers when you store your crypto on an exchange. This has happened many times before in the industry, and it will happen again. Individual accounts can be broken into and wiped out. However, entire exchanges get hacked on a regular basis too. Even if your account is 100% protected with two-factor authentication, it can still get looted if the exchange where your account is located gets hacked.
Cold Storage Advantages
You may have heard others talk about taking custody of your Bitcoin, Ethereum, and other tokens. For someone new to crypto, terms like cold storage, hardware wallets and custody can be confusing. However, they’re all basically talking about the same thing. With a hardware wallet, you can send crypto there from exchanges to completely eliminate the risks I talked about above.
With cold storage, a lot of people think the Bitcoin is actually located on the hardware wallet, but this isn’t true. All Bitcoin remains on the blockchain. The wallet is what controls the access to your Bitcoin. Exchanges are always online and available to target by hackers, but they can’t target your hardware wallet because it isn’t online.
Some people even worry about governments seizing money or closing bank accounts. Hardware wallets are even protected from them, so by using one you’re taking advantage of the full benefits of using Bitcoin and a decentralized currency.
Extra Costs
Anyone that has more than a couple hundred dollars worth of tokens and/or funds on an exchange should take advantage of hardware wallets. The cost to do it is worth the investment in these situations. Think about it like buying insurance for your BTC.
The hardware wallet itself can run you $60 – $150 depending on what model you buy. It’s worth mentioning here that I highly recommend buying these directly from the manufacturer, such as Ledger or Trezor’s website. You can find wallets for sale on Amazon and eBay, but some of these have been confirmed to be modified from their default state. It’s quite likely that third parties selling the wallets may sell you a hacked version that gives them access to your funds. Yep, it’s pretty sneaky and evil, but that’s what some people do these days to get ahead. Avoid all of that trouble for yourself and just don’t buy from those marketplaces, even if it costs you a few extra bucks.
Beyond the wallet itself, the only other additional cost that you’ll incur by using one is a fee for sending your tokens back and forth from exchanges. Each time you transfer your tokens, you’ll get charged a fee by the exchange. This can vary from one token to the next, but it’s very reasonable with Bitcoin and major exchanges like Coinbase or Binance. I’ve transferred $7,000 worth of BTC to a hardware wallet for about 9 cents, so this expense is often very minimal. Other tokens like Ethereum and others based on that chain can sometimes incur much higher fees, so just be sure to look at these before you send your tokens.
Ledger Nano S
I personally use the Nano S as my hardware wallet. This is made by Ledger (not an affiliate link). It’s one of the cheapest devices on the market, but you really don’t need a bunch of extra bells and whistles with it either. If your computer isn’t within reach of your desk, you may want to opt for a Bluetooth enabled version like the Nano X though.
Ultimately, I feel like non-Bluetooth is more secure. There’s no possible way to access that device unless I plug it into a computer. With this wallet, you get access to a software platform called Ledger Live. This lets you manage your device with your computer, and you can even monitor your hardware wallet portfolio with it when your device isn’t connected. I found their shipping to quite fast when I purchased from their website. I had my device in less than a week.
Trezor One
In many ways, Trezor (also not an affiliate link) is a comparable wallet to the Nano series. The Trezor One mostly has the same features as the Nano S, and they cost about the same amount too. I give Nano the win though because their wallet supports a larger number of cryptocurrencies. If you’re only buying and taking custody of Bitcoin and Ethereum, it may not matter which one you buy.
Since the Trezor One and Nano S are mostly the same, I went for the Nano S in case I need a larger number of storage options in the future and because it’s smaller. The Trezor One is much wider, while the Nano is the size of a USB thumb drive.
Hardware Wallet Precautions
I want to give you a few final tips for precautions to take with cryptocurrency hardware wallets. The physical possession of the device itself and your 24 word recovery phrase are of vital importance. If you lose these, you will likely permanently lose access to your crypto. With that said, if you do decide to take custody of your Bitcoin and other tokens, make sure you are extremely careful here. Put these items in a safe location. Some people will take crazy measures to try to hide these things to protect them from theft, since physical theft is possible with hardware wallets. However, unless others know you have that crypto, I really wouldn’t worry about it too much. I’d be more concerned with losing the device instead of someone stealing it. If you have enough funds to really worry about a physical theft, there are companies that will hold your devices in true cold storage for you for extra security.
One other precaution that you need to take has to do with exchanges and limits to your account wallets. On a Nano S, you can set it up to store many different kinds of crypto besides Bitcoin and Ethereum. You could store Chainlink, Cardano or Solana coins. However, you need to be careful about what you send to your wallet because you may not have a way to get it back out and sell it when you want to do so.
As an example, Coinbase users actually only have access to a Bitcoin wallet address for sending crypto to that exchange by default. You could transfer Ethereum from Coinbase to your hardware wallet, but you won’t be able to move it back to that exchange. If you try to send it anyways, you’ll lose your Ether. Make sure you look into this type of information with your exchange to be sure you can freely move tokens back and forth as needed. Sometimes the solution is just to have an account with multiple exchanges.