You’ve purchased cryptocurrency to add to your investment portfolio. But you’ve also heard about lost keys, unrecoverable funds, and theft. So how can you protect your investments?
We’ve compiled a list of things to consider as you explore the wonderful world of digital assets.
For starters, the same general principles of sound financial management apply to digital assets. It wouldn’t be reasonable to carry your entire net worth in cash in your pockets. It also wouldn’t be prudent to keep all that cash at home in a drawer. When thinking about investing in cryptocurrency, you should also be thinking of how you will keep it safe.
You may have come across the concepts of cold and hot storage or wallets. In short, hot wallets are connected to the internet, while cold wallets are not. Hot wallets are the most commonly used since they are simple but are vulnerable to theft or hacking. Cold wallets are considered much more secure since you only connect them to the internet when executing a transaction.
Wallets allow users to manage, secure, and use cryptocurrencies. When choosing a type of wallet, cryptocurrency enthusiasts can choose between software or hardware wallets. Software wallets include web-based, mobile, and desktop solutions.
Hardware wallets are more secure and fully empower the user with the storage and management of their digital assets but are a bit less user-friendly. These hardware wallets connect to a computer via USB or other port to facilitate transactions and, when disconnected, essentially act as cold storage for your assets. The user is solely responsible for managing passwords and recovery phrases; lose those or the physical device, and you could stand to lose your investments, too.
When choosing a wallet, consider a hybrid approach, where you hold a small amount of cryptocurrencies in a hot wallet (allowing easy access and transactions) while keeping the bulk of your investment in a cold wallet or with a trusted, independent custodian.
Strong, Unique Passwords
When creating passwords, consider using a unique password generator, making them completely random. You may also wish to use a password manager to ensure you keep track of your unique passwords and recovery phrases. Ultimately, you will want to make sure that your passwords are stored securely.
If you are using a mobile wallet or an app to manage your digital assets, you will also want to make sure your mobile phone is as secure as possible. Depending on your device, you can download additional protection. It’s also particularly important to be aware of phishing scams; don’t click on unknown links, which can serve to install malware and can lead to theft. Never download software that allows someone to remotely access your mobile or computer.
Exchanges, brokerages, mobile apps… cryptocurrency service providers abound! There’s an important and growing volume of providers and it can be difficult to know where to start.
Unless you plan on trading on a daily basis, choose to keep your cryptocurrency with a reputable and unconflicted custody provider.
If you are considering an exchange to facilitate more regular trading, do the work to understand the risks. While great cryptocurrency exchanges exist, exchanges can be attractive targets to hackers. Some providers make promises that they cannot keep. When choosing to use an exchange, make sure their solutions are time-tested, that you fully understand how to use them, and that you know exactly where your private keys are held. Unless an exchange uses an independent custodian, you should also avoid keeping assets there long term.
And remember: if it sounds too good to be true, it probably is.
Engage Your Financial Institution
Organizations are paying close attention to this growing market, but cryptocurrency services are not yet commonplace in traditional financial institutions. You may wish to engage your financial advisor on whether your institution is planning on offering such services. This will help guide you in your decision-making.
The rise of investments in cryptocurrencies is leading to some disruption in estate planning. Unlike traditional or physical assets (like your house, jewelry, and bank account), planning to leave your digital investments to your next of kin requires a new type of attention. To ensure your loved ones can access your assets in an emergency or in the event of your death, you may wish to set up some form of conditional access to your password manager to a trusted person and include instructions for asset retrieval in your succession planning documents. While not legally binding, this may prevent your digital assets from being lost.
Take Your Time
Deciding to invest is a big decision, regardless of the investment you choose. Take your time to fully understand your own risk tolerance (if you’re a conservative investor, for example, cryptocurrencies may not be for you) and to choose your path forward. Don’t succumb to pressure or let the fear of missing out rush you; research, study, ask questions, and reflect before you move forward. Investing in reputable companies working to build the infrastructure that will support a regulated digital asset market may be a more appealing choice for those not willing to deal with the risks associated with cryptocurrencies but still interested in riding the wave.