The safest way to store crypto: Exchange, Wallet or Cold Storage?
Crypto exchanges are basically digital marketplaces that allow you to use real money ($AUD) to buy cryptocurrency like Bitcoin and Ethereumexchange one type of crypto for another and convert your crypto to cash.
The most popular exchanges like Binance, Coinbase, CoinSpot and eToro are run like any other online platform (i.e. they don’t leverage the blockchain and are considered “centralised”). This is also why they are popular: they are user-friendly and practical. Decentralized exchanges that support direct peer-to-peer transactions do exist, but are often more complex to use.
Your account on a centralized exchange can be described as a wallet. However, storing your crypto on exchanges usually means that the company retains control (or “custody”) of the assets and users cannot access the private keys. This is called a custodial wallet, or sometimes a hosted wallet. You need to trust the company running the exchange to take care of your assets and run a tight ship.
Unfortunately, while many exchanges are ethical and vigilant, it only takes one bad exchange to wreak havoc on the entire industry. As was the case with Sam Bankman-Fried’s FTX, which has since filed for Chapter 11 bankruptcy: Thousands of investors have entrusted their crypto holdings to his company, which later turned out to back his fund speculative Alameda Research. Bankman-Fried now faces criminal charges of fraud.
Hot crypto wallet
Hot wallets are online, software crypto wallets. Your account on a crypto exchange can be classified as a hot wallet because it is connected to the internet.
Specifically, noncustodial or self-custodial hot wallets are internet-connected wallets where you control the private key and seed phrase of your crypto assets. Private keys are stored in the app/software itself.
Being able to access a noncustodial wallet through a web browser or app is convenient, but like anything online, it makes these wallets vulnerable to cybersecurity threats, hacks, scams, and fraud.
Offline wallets are called cold wallets. These days, that usually means a physical device, which can range from a thumb drive to purpose-built hardware with custom security and accessibility features. Cold storage can also include paper documents, but it is an approach that is not appreciated due to the fragility of paper.
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