When you buy Bitcoin for the first time, one of the things you must think about is security and the risks you yourself might pose to your Bitcoin.
When you buy stocks through apps like EToro, you rarely think in terms of ownership or transferability, or the idea that someone could come along and run off with your stocks – or that you could lose access… forever! Sure, with stocks you “own” a piece of a company, but if you were to try and get your stock out of the app and hold it elsewhere, you will find things are not that easy.
When it comes to Bitcoin, we must think differently. With Bitcoin, we hold true ownership over our asset and we must ourselves make sure our funds are safe. Here are some options to consider.
Keeping Your Bitcoin On Exchange
When you buy Bitcoin on an exchange like AAX, you legally own your Bitcoin. You are able to prove that you bought that coin and when you log in, you are free to exchange the coin or withdraw the funds into another wallet.
However, the actual private keys that give the ability to move Bitcoin on the blockchain are held by the exchange. By keeping your funds on an exchange, you are relinquishing custody (just like when you put your money in the bank). The disadvantage is that you are trusting others to keep your Bitcoin safe. Moreover, if a court were to order the seizure of your assets, the exchange would have to comply.
However, keeping your funds on exchange also comes with benefits. For example, if you need to sell your Bitcoin quickly or seize some buying opportunity, keeping your Bitcoin on an exchange like AAX immediately gives you access to a range of spot, derivatives and fiat markets. Also, if you were to forget your password, you would be able to contact the exchange and recover your access. This is not the case if you were to forget your main password (or seed phrase) to your private wallet.
Keeping Your Bitcoin In A Decentralized Wallet
Some Bitcoin investors prefer to keep their Bitcoin off-exchange in a decentralized wallet, for example, Trust Wallet. A decentralized wallet is generally regarded as safe, because it is rooted in the blockchain, with each user holding full custody over their own funds.
If you hold your funds in Trust Wallet, you will also need to hold Ether. Whenever you make a transaction from your Trust Wallet – meaning, you’re sending a signal to the blockchain – you will have to pay a small fee in Ether.
The advantage of holding your Bitcoin in a decentralized wallet is that you are yourself completely responsible for the safety of your funds and no one can take it away from you. The disadvantage is that if you lose your password and seed phrase, you can never access your funds again.
Some wallets now make it easy for you to exchange your coins for other coins by way of decentralized exchange. The quality of such exchange will depend on liquidity.
Keeping Your Bitcoin in Cold Storage
Hardware wallets such as Trezor or Ledger come in handy if you intend to hold large amounts of Bitcoin. Storing your funds on a hardware wallet means taking your details offline – out of reach of any hacker. The benefit is that from a cybersecurity perspective, your funds are now 100% safe. However, from a broader security perspective, this comes with new risks. For example, you could lose your hardware wallet, it could get stolen, or it could get destroyed.
Luckily, if you know the ‘seed phrase’ (given upon generating your wallet on your device), most systems enable you to simply recover the wallet on a new device. Remember, the ownership of Bitcoin is recorded on the blockchain – it never leaves the blockchain. So if you have the seed phrase which gives you access again to the ability to transact your Bitcoin, then your ownership has also been recovered.
For large holders, cold storage may be the safest way. However, to mitigate those ‘other’ risks, some holders opt to employ a custodian (like Koine or Fidelity Digital Assets) who will keep their clients’ Bitcoin in cold storage for them. Of course, exchanges usually also keep the majority of client funds in cold storage.
The Best Way To Keep Your Bitcoin Safe
While every investor in Bitcoin should decide for themselves how they want to keep their Bitcoin safe, we would argue that the best way is to diversify your methods.
For example, you could trade on multiple exchanges, keeping funds in a variety of wallets. This way you’re spreading risk and at the same time able to trade arbitrage. Another option would be to keep some of your Bitcoin in a cold wallet and some on-exchange to be able to capture market opportunities or hedge against bearish trends.
Most traders, however, will opt to keep all of their funds on the exchange, and this is perfectly fine. All you need to do then, before registering an account with any exchange, is to find out how the exchange handles security.
Learn more about how AAX approaches security here.