Trading your cryptocurrencies in exchanges has risks, which investors need to keep in mind. Cryptocurrency has a short track record, yet hacks, crashes, and exploits have already resulted in millions of dollars in losses. In this article, we will explore the concept of self-custody and how it can help you keep your wealth safe.
Risks of crypto exchanges
When you buy cryptocurrencies and store them on an exchange instead of a wallet, you are trusting the platform to keep your coins safe. This is a single point of failure that has led to many hacks and losses in the past. In 2014, Mt. Gox, once the largest Bitcoin exchange, filed for bankruptcy after losing 850,000 Bitcoins to hackers. More recently, in January 2018, Coincheck, a Japanese exchange, lost $534 million worth of NEM tokens to hackers.
These hacks are not isolated incidents – they happen on a regular basis. In the first half of 2018 alone, there was over $1 billion worth of cryptocurrencies stolen from exchanges. This is why it is important to understand the risks of keeping your wealth on an exchange before you decide to buy Cardano or any other altcoin.
To avoid risks, you need to take custody of your own cryptocurrencies. Self-custody means holding your own private keys and storing your cryptocurrencies offline in a secure wallet. This gives you full control over your funds and eliminates the risk of losing them to an exchange hack or shutdown. It also allows you to avoid potential fees and limits that exchanges may place on withdrawals. Taking self-custody of your wealth may seem daunting at first, but it is actually quite simple.
Guide to self-custody
The first step is to choose a wallet that supports the cryptocurrencies you want to hold. There are many different types of wallets available, and each has its own set of features. Once you have chosen a wallet, you will need to generate a seed phrase. This is a 12- or 24-word phrase that is used to generate your private keys. It is important to store this seed phrase in a safe place, as it is the only way to access your funds if you lose your wallet.
After generating a seed phrase, you will need to choose a method of storage. There are two main options:
- Hardware wallets: These are physical devices that store your private keys and allow you to sign transactions offline. They are the most secure option, but they can be expensive.
- Paper wallets: These are simply pieces of paper with your private keys and addresses printed on them. They are very cheap and easy to create, but they are less secure than hardware wallets.
Once you have chosen a storage method, you will need to transfer your cryptocurrencies from the exchange to your wallet. This is done by sending a transaction from the exchange to your wallet’s address. Make sure to double-check the address before sending, as it is not possible to recover funds sent to the wrong address.
Finally, keep your seed phrase safe. The best way to do this is to store it in a secure location, such as a safe or a safety deposit box. You can also split it up and store it in multiple locations. This will help to ensure that you can always access your funds, even if one of the locations is compromised.
The most secure option for crypto assets
When it comes to storing cryptocurrencies, there are two main options: hot storage and cold storage. Hot storage refers to keeping your coins on an exchange or online wallet, while cold storage refers to offline storage in a secure location, such as hardware or paper wallets.
Hot storage is convenient because it allows you to trade and use your coins quickly and easily. However, it is also very risky. This is because online wallets and exchanges are constant targets for hackers. If your coins are stored in a hot wallet, they are at risk of being stolen by a hacker.
Cold storage, on the other hand, is much more secure. This is because your coins are stored offline in a location that is not connected to the internet. This makes it much harder for hackers to steal your coins, as they would need physical access to the storage device. Cold storage is considered to be the best way to keep your cryptocurrencies safe from hackers.
By following these steps, you can take self-custody of your cryptocurrencies and avoid the risks of keeping them on an exchange. This will give you peace of mind knowing that your funds are safe and secure and that you are in control of your own wealth.