Storing Cryptocurrencies Safely: Are Digital Wallets Safer Than Exchange Custodial Wallets?

In recent years, it has become increasingly difficult to trust trades. While cases of cryptocurrency fraud and hacking via exchanges are on the rise, there have been instances where exchanges have halted withdrawals owing to internal issues. In one of the most recent crypto heists, hackers stole about $615 million in bitcoin from blockchain company Ronin Systems in March of this year.

How Are Cryptocurrencies Stored？

You may either buy cryptocurrencies via an exchange like Binance or FTX and store them in their custodial wallets, or you can buy from a platform like crypto.com or Metamask, which will offer you with a digital wallet address on the blockchain, a public key, and a private key. When you buy cryptocurrency via an exchange, your money is housed in the platform's account, and when you send money to someone, it passes through the exchange and is thus traceable. A custodial wallet is the name given to this sort of wallet. This method, known as Centralized Finance (CeFi), is comparable to that used by traditional banks. When you keep cryptocurrency in a digital wallet, you receive a wallet address and can conduct person-to-person transactions without having to go through an exchange. Decentralised Finance is the name given to this system (DeFi).

How Can You Protect Your Cryptocurrency？

Spread Your Investments: Distribute your crypto into multiple wallets so that if one wallet is compromised, you still have crypto in other wallets. “CeFi functions as your bank and custodian, holding and preserving your digital assets and monies on your behalf,” explains Dileep Seinberg, founder and CEO of MuffinPay, a crypto payment and e-commerce platform. You can register with either your email address or your phone number. It is simple to retrieve your password if you forget it.

The advantage of using digital wallets in the DeFi system is that you get private keys that allow you to access your blockchain holdings, and you don't have to rely on exchanges to store your crypto.

“Both types of wallets give their own unique sets of advantages and cons, and each will appeal to various traders,” says Michael Peng, chief compliance officer at Paxful, a P2P crypto trading platform. Custodial wallets imply that a third party is keeping your Bitcoin private keys for you—in most situations, the exchange or platform from which you purchased the Bitcoin. Non-custodial wallets, on the other hand, allow you to keep your own private keys, providing you complete control over your cash.

Maintain Your Private Keys Safe: It is critical to keep the private key data safe. Keeping the information on your computer can be dangerous if your system is compromised. One alternative is to keep your private key offline by transferring it to an encrypted USB flash drive (cold storage) (one-gigabyte flash drive is enough to store private keys). Hardware wallets include the Ledger, Trezor, and Safepal.

If you lose your private key, you usually won't be able to access your cryptos again. “Around 4.5 million Bitcoins cannot be redeemed since some customers misplaced their private keys,” says Gaurav Dahake, CEO and founder of Bitbns, a crypto exchange. Consider this: the security of a bank locker is superior than that of your home.

You can, however, try to recover it using Recovery Phrase, which serves as a “master key” for all of your crypto accounts. This phrase essentially refers to the private keys in mnemonic form, a string of 12 to 24 phrases. You can store fragments of the recovery phrase in multiple locations so that if one of your systems is compromised, the hackers only have a portion of it.

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