Introduction
Cryptocurrencies are a hot topic in the world of finance and investment. They are becoming increasingly popular among investors and traders. However, with this growing popularity comes the need to keep these digital assets safe and secure. Many new investors, perhaps like you, still need to decide whether to store their assets in third-party crypto exchanges or by themselves (in crypto cold wallets).
Of course, deciding where to store your crypto coins can make or ruin your crypto investment experience. Hence, many crypto investors are asking:
- Are crypto exchanges safe?
- Cold Vs. Hot wallets, which is safer?
- What happens when I lose my cold wallet and private keys?
And many more.
To help you put your best foot forward, I’ll quickly:
- Discuss why you may prefer storing crypto coins in exchanges —and why not
- Mention the gains and pains of using crypto cold wallets
- Guide you to make an informed decision on where to store your coins
Storing Your Coins in Crypto Exchanges
Crypto exchanges—such as Binary, Coinbase, and Kraken—provide investors with a Custodial Wallet storage service.
This storage option limits investors’ control and ownership of their crypto coins. Instead, you entrust the holding company (custodian) to manage and secure your wallet.
You’re probably asking—are crypto exchanges safe?
To some degree, they are safe. But not safe like mainstream Financial Institutions.
These third-party firms promise to safeguard your wallets and, in some cases, provide insurance for top investors. This way, the exchange bears the cost of any loss from fraudulent internet activities, such as cyber-attacks. However, this is not the same as FDIC insurance for depositors.
Let’s review the typical pros and cons of using crypto exchange wallets.
Pros of Crypto Exchanges – Here are some reasons investors prefer custodial wallets.
Less Responsibility
With exchanges, you’re less concerned about your investment security. This is an excellent perk for new investors who would instead commit the management and security of their assets to a more experienced third party. At the same time, they focus on growing their investment.
Password Reset
Knowing your funds are intact, even when you forget your secret code is a huge relief. In such supposedly hopeless situations, the exchange company allows you to easily reset your password and regain access after a few security questions.
This is a significant advantage over crypto cold wallets, where users who forget their passwords may as well forgo their funds.
Cheap to Operate and Easy-to-use
Most exchange wallets are primarily free, except they charge a tiny fraction of your recurring transactions. This is good news for small investors who need help to afford a hardware wallet.
Custodial wallets usually feature a user-friendly interface, a feature appreciated mainly by new traders. In addition, these crypto exchanges easily connect to and allow seamless interaction with decentralized apps and several other opportunities within the crypto ecosystem, such as yield farming and staking.
Cons of Crypto Exchanges – Now the Bad Stuff
Prone to Cyber Attacks
Online criminals are the biggest threat to custodial wallets. Crypto exchanges suffer considerable losses to hackers in billions of dollars annually.
In 2020, KuCoin reported a security breach where crypto assists worth over $275 million were compromised. Additionally, a hack ripped BitPoint off about $32 million in investors’ funds a year before.
Unlike US banks, exchanges do not provide investors with any FDIC insurance. Unfortunately, that means you’ll lose your funds in the case of bankruptcy—whether caused by a cyber attack or the volatile crypto market.
Third-Party Control – and Not You
Remember: a crypto exchange, or custodian, is responsible for securing your private keys. As such, you do not control your assets. Instead, the exchange platform oversees the funds and sometimes uses your assets against your wish.
Accessing your wallet can be tricky if you are in an environment with poor internet connectivity.
Also, expect access limitations in countries and jurisdictions with anti-crypto laws. Since custodial wallets require internet connectivity to operate, it’s easy for local authorities to disrupt crypto activities from the IP. Another massive downside to exchanges is when your exchange no longer allows transactions from your country. An all too common problem and happened several times recently in the US.
Storing Your Coins in Crypto Cold Wallets
A cold crypto wallet is a hardware device that stores your crypto’s private keys offline. Cold storage wallet options may include paper wallets,
This physical storage is not internet-dependent, keeping your crypto assets free from online hackers.
Ledger , the most popular, and Trezor are top-rated manufacturers of cold hardware wallets.
Like crypto exchanges, hardware wallet users also report some gains and pains:
Pros of Cold Wallets
High Security and Absolute Control
Being an offline storage solution is the most significant advantage of crypto cold wallets over custodial wallets. In addition, crypto cold wallets rule out the risk of hacking and other cyber attacks.
These wallets offer you absolute possession of your device and private keys, leaving the safety of your investment under your watch.
Like your physical fiat wallets, cold storage gives you direct, real-time, and total control of your digital coins, eliminating third-party influences on your coin’s security and overall investment experience.
Even more, top cold storage providers like Ledger provides software that helps you trade your coins like hot wallets but without using exchanges. This adds flexibility and convenience to security and privacy.
Cons of Crypto Cold Wallets
More Responsibility and Slightly Delayed Transactions
The freedom from crypto cold wallets also comes with more responsibility. Compared to custodial wallets that allow you to reset your logins, misplaced or damaged cold wallets may mean forfeiting your account and entire investment.
Trading coins via your hardware wallets could take a little more time and effort. For example, coins will be transferred first to an exchange to enable transfer between exchanges. However this is a small price to pay for the overriding security benefit.
Relatively Expensive Upfront
Cold wallets may cost between $50 to about $250, whereas exchanges charge a small percentage of your trading volume. This high purchase cost is a turn-off, especially for small crypto investors.
To summarise, this table compares the pros and cons of crypto exchanges and crypto cold wallets, helping you make a well-informed crypto investment. However the small upfront cost is better than losing access to all your assets in an exchange.
Crypto Exchange Wallet | Crypto Cold Wallet | |
Private keys | No access to private keys. A third party manages and controls | You alone have and control your private keys |
Cost | Initial registration is usually free. Charges may be deducted on transactions | Hardware wallets cost anywhere between $50 and $250—or more |
Security | Highly vulnerable to cyber attacks | Zero hacking risk. But a damaged or lost wallet is not recoverable |
Transaction | Takes time to reflect transaction value | Instantly show the transaction value |
Password Reset/Recoverability | Easy to recover/reset forgotten security pass | Lost or damaged token cannot be remedied |
Accessibility | Requires internet connectivity to access wallet | Wallet can be accessed without internet and from anywhere |
Conclusion – Which Crypto Wallet is Best?
Both crypto cold wallets and exchange wallets have their strengths and weaknesses. Your best bet would be whichever has features that promote your investment goals.
However, I can only recommend crypto wallets to a small-scale crypto investor seeking in-the-meantime storage. Well, it’s free to set up.
Otherwise, cold hardware wallets tick the most critical box for sizeable long-term cryptocurrency investment—SECURITY.
A most recent lesson for investors is the collapse of FXT, the world’s second-largest crypto exchange platform. Owned by Sam Bankman-Fried (Dubbed King of Crypto), FXT, which once traded up to 15 billion USD daily, filed for bankruptcy in November 2022. To date, FXT investors are counting their losses.
Remember: the safety of your funds is of utmost priority, particularly in an investment with a sky-high security risk.
For your convenience and flexibility, top cold wallet makers – like Trezor and Ledger – boast exciting features, including software allowing you to transfer your coins easily. In addition, some versions are Bluetooth-enabled, allowing connectivity to your smart devices.