You’ve probably come across the “not your keys, not your coins” mantra on several crypto blogs. The expression reinforces the need to own the private keys associated with your funds and expresses the belief that you can never be 100% certain of your crypto holdings unless they are stored in a wallet in which you personally hold the keys.
You may be having doubts about moving your crypto funds into a cold storage device such as a hardware wallet, considering its cost. Nevertheless, who is more qualified to give you some sound crypto advice than someone who is already active in the industry?
DAO Times quizzed members of the crypto community on why crypto traders and investors should move their funds into cold storage. This article is a compilation of some of the responses and reasons we received.
A standoff between convenience and security
There is no denying the fact that hot wallets like crypto exchanges offer a greater level of convenience, especially for traders. However, Bankless Times CEO Jonathan Merry put it succinctly when he said that the “risks related to cyber-attacks are one of the biggest threats to the crypto market. Unfortunately, the common mistake people make is choosing convenience over security by using online wallets instead of hardware wallets.”
To put things in perspective, leading cryptocurrency exchange Binance lost $41 million worth of Bitcoin in 2019 after hackers compromised its hot wallet. A year later, the Asian cryptocurrency exchange KuCoin also suffered a blow of USD 150 million. More recently, FTX’s collapse sent shockwaves through the crypto space after the exchange platform paused withdrawals and later filed for bankruptcy in November 2022. The bottom line is that crypto users have lost millions to security breaches on hot wallets.
Cold storage is the most secure way to store your crypto
Your cryptocurrencies can be stored in either a cold or hot wallet. Exchange wallets, web wallets, and software wallets like Exodus are all examples of hot wallets. They are always connected to the internet to facilitate real-time transactions. These wallets are the most popular because they allow traders to quickly buy and sell. But despite their popularity, hot wallets are prone to security breaches.
That said, there is a consensus that cold wallets, which are mostly offline, are the safest way to store your cryptos. For Frisson, it eliminates the need for third parties by taking advantage of “the unique crypto-economic security properties of blockchains.”
Centralized exchanges, for instance, are a honeypot for hackers and malicious actors, and Andrew Fisher, Founder of Coin Flipper sees this as enough reason to keep his funds in cold storage. There have been countless hack incidents over the years to prove this point. Furthermore, “hardware wallets are not susceptible to computer viruses.”
Not your keys, not your coins
To be fair to centralized trading platforms, some participants in the space have done a great job keeping their users safe. But like Matthew de la Fuente, CEO of Chainles, said,
Just because an organization says they offer ‘Custody’, it doesn't mean that your assets are protected.
Beyond the fact that the company has the upper hand, it can decide to go rogue.
The recent saga around the popular crypto trading platform FTX buttresses this point. Surprisingly, the founder of the company, Sam Bankman-Fried, had a few days earlier assured traders on Twitter that all was well with his company.
In general, “cold storage provides security, easy access, and better control of your crypto. By moving your assets into cold storage, you can avoid the risk of losing your assets due to hacks or other security breaches on third-party exchanges or wallets,” Savvy DeFi building said.
And they will sale your personal data
For example Coinbase, a centralized cryptocurrency exchange, has notified its customers that they will be sharing or selling user data, including information from both active and former customers, for marketing and other purposes.
Are there any downsides to storing your crypto on cold storage?
Although the pros of moving your crypto into an offline device are more than the cons, it is important to know that there are some downsides to doing so. Juan Oliva, director of marketing at Chainstack, explained that the biggest con was the lack of instant liquidity available on a centralized exchange. “So if crypto starts going downhill in a hurry, you can attempt to sell it quickly before it's too late,” he added. Similarly, Valerio, Content Lead at Yeeha Games, Bybit's GameFi platform, opined that cold wallets were not entirely failproof due to human error.
If you approve unlimited transactions for a specific DEX (i.e., the standard setting on Metamask), even when your cold wallet is not connected, if the DEX is hacked, your funds can be siphoned.
In extreme cases, your hardware wallet may have been compromised right from the retailer. To tackle this challenge, David Kemmerer, co-founder and CEO of CoinLedger, advised traders to buy products directly from the manufacturer. “Buying them from third-party retailers is risky. There have been cases in the past where malicious vendors installed programs in the wallets that later stole digital assets kept in them,” he said.