The need to secure financial assets is as old as money itself. Even in the 21st Century it hasn’t gone away—in fact, it might be more of an issue now than at any point in history. Legendary poker player Doyle Brunson used to ‘secure his money’ by putting his bankroll of bills under the front wheel of his car and then backing over it it. That did the job at the time and his hard earned cash was protected from criminals and cheats.
Saving and using money is much more convenient now which is why the overwhelming majority of adults don’t carry their net worth around in a thick roll of hundred dollar bills. Even as the payment process becomes more and more frictionless both consumers and financial companies are forced to balance ease of use against security. This is a good starting point to examine a major issue in the mainstream adoption of cryptocurrency—the general public isn’t used to the idea that they’re completely in charge of how their financial resources are secured. The balance between ease of use and security is still present with cryptocurrency but the end user is ultimately left to determine the best way to protect their assets.
THE BEST WAY TO SECURE CRYPTOCURRENCY PURCHASES
By now, even novice cryptocurrency enthusiasts understand the security issues that come with using online wallets provided by exchanges. It may be the most convenient in terms of accessibility and use but there are significant security downsides. The fact that most online wallets require that you entrust your private keys to the online wallet provider could be their biggest security liability. When it comes to ownership and safety control of your private key is everything which is why more experienced crypto owners look elsewhere.
At the other end of the security spectrum is the paper wallet. The primary strength of the paper wallet is that it is completely offline and requires a sometimes tedious process to get your assets back into the blockchain ecosystem. Since you’re basically just printing out your private keys and associated addresses this solution is far from ‘state of the art’. Ironically, assets entrusted to a paper wallet share many similarities with cash and necessitate great care to store and protect. Also like cash—if your paper wallet is lost or destroyed you’ve lost access to your crypto assets. For this reason, many paper devotees keep their wallets in bank safe deposit boxes. Once again, you’re putting your assets into the stewardship of a third party and now you’ve involved the analog era financial system.
HARDWARE VS. SOFTWARE WALLETS
Software wallets are without a doubt the most popular type of cryptocurrency management tool. These are applications installed on your smartphone or PC and allows you to save, move and spend cryptocurrency in much the same way as an online wallet but offers the advantage of keeping private keys in your control. The quality of software wallets can vary widely as can the security of cellphones or computers. Using a high quality wallet on a well protected and encrypted cellphone is fairly safe. The problem is that you’re still connected to the Internet and hackers are intimately familiar with any security vulnerability—and particularly those of extremely popular models such as the iPhone.
The real and perceived security liabilities of software wallets has created a booming industry in hardware wallets. There are several types of hardware wallets from the Ledger Nano and KeepKey devices that interface with a separate application for asset management to the completely analog Ballet Cryptocurrency Wallet that closely resembles a thick metal credit or debit card. All hardware wallets share several characteristics. Most significantly, your private keys are stored offline in a device specially designed to offer the highest level of security. Hardware wallets use a proprietary software application to facilitate transactions but since your most sensitive information is offline your crypto assets are safe even in the event that a third party gains control of your PC or phone.
Another advantage of hardware wallets is that they create a de facto second authentication factor for transactions. The Ledger Nano and KeepKey require that you verify transaction details such as address and amount on the device screen as well as within its software counterpart. The additional step in the transaction process is a negligible trade-off or a significantly higher level of security. It also provides peace of mind should you lose a hardware wallet—assets can’t be compromised without access to the accompanying software along with knowledge of security protections such as device PIN and software password. A lost hardware wallet can be replaced and restored with the now ubiquitous 24 word recovery phrase.
Cryptocurrency offers unmatched freedom and personal control of financial assets. There’s much to be said for a completely decentralized financial ecosystem but it does require a higher degree of personal responsibility for the security of assets. Ultimately, that personal responsibility also includes a decision about the method by which you want to manage your assets. For most individuals who own significant crypto assets the hardware wallet provides the highest level of security while retaining a reasonable amount of convenience.