Cryptocurrency investment is high-risk and complex. The market is volatile, regulators are still rallying to form a policy framework, and numerous scams and fraudulent activities have emerged in recent years. A Web3 security firm, DeFi, found that hackers stole around $2 billion in cryptocurrencies in 2023 and around $3.8 billion in 2022. 

It’s no surprise that India, too, has witnessed numerous crypto scams, given that the market is forecasted to reach $343.5 million in 2024, with a user penetration rate of 18.78%. Remember that investing in cryptocurrency requires obtaining appropriate financial advice and investing in only what you can afford to lose. 

Related: Why Is the Crypto Market Rising Today?

Why is it Essential to Store Your Cryptocurrency?

A cryptocurrency is a digital asset that exists on a network of computers running in a ledger of transactions built on blockchain technology. These digital tokens, like Bitcoin and Litecoin, do not exist in a physical form. Crypto wallets store cryptocurrencies, which is fundamental to safeguarding the ownership of digital assets.

A crypto wallet is software that creates and stores public and private keys, allowing users to send, receive, store, and monitor crypto assets. A public key contains a long string of alphanumeric characters shortened to make up a wallet address used to receive cryptocurrencies. A private key is required to process the transaction.

Both public and private keys are used to perform successful cryptocurrency transactions. As the name suggests, a public key (like a QR code) is visible to the public and is used to receive cryptocurrencies. The sender, on the other hand, needs a private key to process the transaction. A private key is private to users and protects their digital assets from unauthorized access.

Malicious actors may try every method to access the private key and steal cryptos stored in the wallet. Remember, if you accidentally lose or destroy the private key and seed phrases, your cryptos will be lost forever.

Types of Crypto Storage

Crypto Exchanges

Crypto exchanges are online platforms that help traders buy and sell digital currencies in exchange for cash, fiat currencies, or crypto tokens. They allow users to create an account, add funds to trade their investment in INR to buy cryptocurrencies like Bitcoin or Litecoin, trade crypto tokens for another, or receive the value of their return in cash to their bank account.

There are two types of crypto exchanges. A centralized crypto exchange (CEX) functions like a bank setup that traders trust to conduct transactions or store their digital assets. This means giving complete control to the centralized crypto exchange, including access to the private key. For this reason, CEX is called a custodial wallet, as users don’t have access to private keys.

On the other hand, a decentralized crypto exchange (DEX) leverages blockchain technology to add security to your trading. Such crypto exchanges eliminate third parties—and instead, buyers and sellers directly trade crypto tokens for one another without using cash or fiat currencies. DEXs are known for providing non-custodial wallets, also known as self-custodial, as they provide users complete control of their private keys.

Hot Wallet Storage

Hot wallets are online software for sending, receiving, storing, and monitoring crypto assets. They function like online banking, where users can access their crypto wallet and public and private keys via smartphones, desktops, laptops, and tablets connected to the internet. Users need to be connected online to access their crypto wallet.

Cold Wallet Storage

Cold wallets can be classified as offline wallets that use physical or hardware devices, such as a USB drive or smartcards, that store users’ public and private keys. It comes in various physical forms depending on the user’s needs. Some cold wallets also perform all the functions required to complete a transaction from a single online device. Cold wallets can also include paper-based documentation, which functions like physical shares. It can be used to store large amounts of cryptos given the security, however, the drawback is that the funds can be permanently lost if the devices are misplaced, lost, or damaged.

How To Compare the Types of Cryptocurrency Storage

When it comes to storing crypto safely, users can choose hardware wallets or self-custody wallets, however, that might be complicated for some people given their infrastructure, according to Nischal Shetty, an experienced software developer who founded a popular crypto platform in India, WazirX. 

Shetty explained that crypto platforms comply with regulators and law enforcement to prevent illicit transactions and ensure multi-level KYC checks, ID verification for onboarding users, and fund withdrawals—overall required to provide a secure operating environment for all users.

Managing crypto assets via wallet has pros and cons, says Sumit Gupta, who co-founded the cryptocurrency trading platform CoinDCX.

Gupta explained that while traditional cold wallets offer robust security, they require careful handling of physical devices. Self-custodial wallets provide greater control but pose the risk of asset loss if seed phrases are forgotten. Centralized exchanges offer convenience but involve trusting a third party with funds. 

It is crucial to choose a compliant crypto platform for legal protection and recourse in case of unforeseen events, added Edul Patel, founder of a crypto investment platform, Mudrex. 

Patel explained that users need to regularly update security measures, such as two-factor authentication and encryption protocols, across all storage solutions to add protection against evolving threats to a great extent—all of which balances convenience with security, empowering investors to manage their cryptocurrency holdings effectively while minimizing potential vulnerabilities.

Frequently Asked Questions (FAQs)