Crypto wallets and security: how to store your cryptocurrency
The question "where do I keep my crypto?" has a surprising answer: coins never leave the blockchain. What a wallet stores are the keys that let you move them. And whoever holds the keys holds the coins.
Two ways to hold them
On an exchange (third-party custody)
You buy on a platform and leave the balance there. It is the most convenient option: forget your password and you can recover it. The trade-off is that the company holds the keys. If it goes bankrupt, gets hacked or freezes withdrawals, your balance depends on it; the FTX collapse in 2022 showed this in the worst way.
In your own wallet (self-custody)
An app or device generates your keys and only you have them. Nobody can freeze you, but there is also no one to call if you lose them. More responsibility, in exchange for full control.
Many people combine both: a small amount on the exchange for trading and the rest in self-custody.
The seed phrase: the most important part of this guide
When you create your own wallet you get a list of 12 or 24 words: the seed phrase (or recovery phrase). With it, the entire wallet can be rebuilt on any device. That means two things:
- If you lose it and your phone breaks, your coins are gone forever.
- If anyone else sees it, they can take everything without needing your phone or password.
Types of wallets
- Phone or browser wallets ("hot"): free and handy for everyday amounts. They are online, so they depend on your device's security.
- Hardware wallets ("cold"): a small device that keeps keys offline and signs transactions internally. The recommended choice for significant amounts. Buy only from the manufacturer's official store, never second-hand.
Common mistakes that cost money
- Sending on the wrong network: a coin can live on several blockchains. Make sure both sides use the same one and send a small test first. We explain it in the stablecoins guide.
- Typing addresses by hand: copy and paste, then check the start and the end. Some malware swaps the address in your clipboard.
- Signing without reading: connecting your wallet to unknown sites and approving whatever they ask is the most common way wallets get drained.
- Reused passwords and no second factor on exchanges: turn on two-step verification with an authenticator app, not SMS.
And before trusting any promise of easy profits, read the crypto scams guide.