Safest Way To Store Crypto: Exchange, Wallet or Cold Storage?

The first decision to make is how comfortable you are with custodial storage, or the extent to which you want self-custody (essentially: be your own bank).

While most crypto exchanges are custodial, there are new models emerging that keep users in control of their own private keys and digital assets. Australian company Elbaite has a non-custodial exchange model that facilitates crypto transactions directly between two individuals’ self-custody wallets.

Elbaite’s CTO and co-founder Samira Tollo said self-custody helps investors avoid losing access to crypto held on centralised exchanges if the exchange is hacked, becomes insolvent, or in cases where the company freezes user accounts or withdrawals.

“With recent events that have occurred overseas, such as the FTX breakdown, crypto investors are becoming ever more aware of the risks associated with holding their cryptocurrency in centralised exchanges and so are choosing to self-custody,” she said.

Even when you commit to managing your own assets, choosing how you store crypto is rarely an either/or scenario. Tollo said experienced investors will often have multiple hot and cold wallets to cater for:

  • Holding different kinds of tokens: As an example, she said the Metamask non-custodial wallet was a good beginner-friendly option but only supports ERC20 tokens (tokens built on the Ethereum network). Investors would need an additional wallet to hold Bitcoin and other non-ERC20 tokens.
  • The amount of tokens and investment value: Holding large amounts of crypto and having more funds invested may trigger an increase in your protection measures. “When you are more familiar with wallets or are starting to invest larger amounts, it is a good time to look into more secure storage options such as hardware wallets, which are a type of cold storage.”
  • How often you want to move the crypto: “If they are making many short-term trades, speed might be more important than security to ensure quicker trades, in this case, using a hot wallet.” Tollo said cold wallets were less convenient for frequent trading activity, making them a wise choice for traders holding larger amounts of crypto as a more long-term investment. “Some traders also choose to keep the amount of crypto they intend to use for frequent trading on exchanges for even faster trades,” Tollo said.

To narrow down your options as you determine your ideal mix of storage methods, Danielle Marie said some key factors to consider include:

  • How secure is the platform/hardware? “Make sure that the platform or device you choose has robust security features, such as two-factor authentication, and that it has a track record of keeping its users’ assets safe,” Marie said.
  • What are the costs and limits? Some exchanges charge fees on each trade, whereas hot wallets are more likely to be free, and hardware wallets range in price between under $100 to more than $1,000. Also check how much you can withdraw from your online account if you need to quickly cash out — there may be minimum and maximum amounts.
  • What kind of recovery and insurance is available? Marie said investors should understand a wallet’s recovery options and whether it allows you to set up a seed phrase to restore assets if you lose your private key. “Some exchanges and wallets have insurance to protect the user’s assets in case of hacking or robbery, this can give extra peace of mind.”
  • Is it easy to use? “Look for a platform or device that has a user-friendly interface, that is easy to navigate and understand,” Marie said.