Cryptocurrency Storage : Self-Custody vs. Centralized Exchanges
Mining101
- tagwu
SUMMARY
Securing your cryptocurrency is a critical concern for every user. Below is a simplified guide to the pros, cons, and best practices for two main storage methods: self-custody and centralized exchanges (CEXs).
Self-Custody: Full Control Over Your Assets
Pros
: No third party can freeze or seize your funds.
Enhanced Privacy: No need to share personal information with exchanges.
No Counterparty Risk: You don’t rely on the security or solvency of an exchange.
Cons
Technical Complexity: Managing private keys, backups, and secure devices can be challenging.
Risk of Loss: If you lose your keys or backups, your funds are gone forever.
No Recovery Options: Unlike banks or exchanges, there’s no customer support to help recover lost funds.
Best Practices
Use Hardware Wallets: Devices like Ledger or Trezor keep private keys offline.
Secure Backups: Use encrypted USB drives, metal seed plates, or paper backups stored in multiple secure locations.
Offline Signing: Use wallets that support offline transaction signing to minimize exposure to online threats.
Inheritance Planning: Use tools like PGP encryption or deadman’s switches to securely pass access to loved ones.
Centralized Exchanges (CEXs): Easy to Use
User-Friendly: No need to manage private keys or backups.
Advanced Security: Reputable exchanges invest heavily in security infrastructure.
Recovery Options: Account recovery is possible if you lose access.
Liquidity and Trading: Easy access to trading pairs, staking, and other services.
Cons
Counterparty Risk: You rely on the exchange’s security and solvency.
Regulatory Risks: Governments can freeze or seize funds on exchanges.
Limited Privacy: Exchanges require KYC and track your transactions.
Best Practices
Choose Reputable Exchanges: Stick to well-established platforms like Binance, Coinbase, or Kraken.
Secure Your Account:
- Use strong, unique passwords and a password manager.
- Enable 2FA (preferably with a Yubikey or similar hardware device).
- Avoid SMS-based 2FA due to SIM swap risks.
Withdrawal Whitelists: Only allow withdrawals to pre-approved addresses.
Complete KYC
Hybrid Approach: Balancing Security and Convenience
Store a Portion on CEXs: Use exchanges for trading, staking, or quick access to funds.
Store a Portion in Self-Custody: Use hardware wallets or secure mobile wallets for long-term storage of significant amounts.
Example Allocation
Non-Technical Users: 70% on CEXs, 30% in a user-friendly wallet like Trust Wallet.
Technical Users
General Security Tips
Use dedicated devices for crypto activities.
Keep software and firmware updated.
Avoid downloading files or clicking on suspicious links.
Backup Encryption
Use tools like VeraCrypt or PGP for encrypting backups.
Store backups in multiple secure locations.
Phishing Awareness
Always verify URLs and avoid clicking on links in emails or messages.
Use bookmarks for accessing exchanges or wallets.
Inheritance Planning
CONCLUSION
: Non-technical users can rely more on CEXs, while technical users can opt for more self-custody.
Diversify Storage: Don’t put all your eggs in one basket. Combine CEXs and self-custody for better security.
Stay Vigilant: Cryptocurrency security requires continuous learning and proactive practices.
FAQs on Cryptocurrency Storage
Which is safer: self-custody or keeping crypto on a centralized exchange?
Each option has risks and benefits. Self-custody gives you full control but requires technical knowledge and responsibility for security. Centralized exchanges provide convenience and recovery options but introduce counterparty risk. A hybrid approach—keeping a portion in self-custody and a portion on exchanges—is often the best balance.
What happens if I lose my private key or seed phrase?
Merged mining allows miners to simultaneously mine PEP along with other Scrypt-based cryptocurrencies like LTC and DOGE without additional hash power. This increases mining efficiency and rewards.
How often should I update my security measures?
Regularly review and update your security practices. Enable two-factor authentication (2FA), update software and firmware, periodically change passwords, and review account access permissions. Keeping up with the latest security threats and best practices is crucial in the crypto space.
