It’s no secret that cryptocurrency can deliver some absolutely insane gains that make the stock markets look like an old man’s game. But here’s the thing- a lot of those 2x, 10x, and 100x gains more often than not take a long time (years) to happen. Patience and stoicism are absolutely key. So do you think that the O.G. hodl crowd lets their Bitcoin and other cryptos sit on an exchange? Hell no. Enter hardware wallets!
Cryptocurrencies are different than stocks
This has to be said. Cryptos are a lot of different things, but they are not stocks. With a stock, there is a document somewhere saying that you own X amount of shares in Apple (i.e.) and that you’re entitled to the dividends associated with that stock. If you think about the basics of what cryptocurrency is in the physical universe, it’s just lines of code existing across millions of computers or nodes that interact with each other. Still, no matter where you buy your crypto, it has to be stored somewhere.
All crypto is stored somewhere
Cryptos have to be stored somewhere. If you buy a cryptocurrency on an exchange, your crypto wallet and private keys exist on that exchange’s servers until you move them elsewhere, whether that’s another software (hot) wallet or hardware (cold) wallet. All you have when you buy coins on an exchange is an “I owe you” for that crypto from the exchange, which you may have only just learned about. If you buy a crypto ETF or trust like Grayscale Bitcoin Trust (GBTC), you do not have claim to any coins- only the market value of shares of the trust. Still, Grayscale and these ETFs do have cold storage where they keep the coins. In this article I’ll be going over why a hardware wallet is the best possible choice for storing your cryptocurrency. Before you start calling me paranoid and doubting that a major publicly traded company like Coinbase can get hacked, know that cryptocurrency is an extremely young technology and you are an early adopter if you’re here reading this. Less than 2% of the world’s 8 billion people own or transact in crypto, so the technology is less than mature and unfortunately the space is full of shitbags and scammers. Bitcoin’s brief decade of history is littered with hacks and security breaches. New coin exchanges are popping up faster than laws and regulations can actually vet them to make sure they’re legit. Crypto is still a jungle. And for the love of God, don’t use Robinhood to buy your cryptocurrency. You cannot transfer your coins off of Robinhood- all you have is an IOU from Robinhood to give you back your fiat for the fair value of the coin. Remember when Robinhood suspiciously froze trading on GameStop stock when the hedge funds Robinhood sells its user data to were losing billions? Yeah…..
Here are the top 5 reasons why having your crypto stored in a hardware wallet is the way to go:
- In Case of Regulatory Cryptomaggedon
If you’ve been in the crypto space for any length of time, I’m sure you’re well aware of the FUD that has constantly been created by nation-states, namely the Chinese Communist Party. China has been essentially trying to get rid of all cryptocurrency within its borders since 2017. Since nation-states control monetary systems and interest rates, there’s plenty of incentive for governments to make cryptocurrency illegal. If such an event were to happen, exchanges would be the easy targets for governments to go after because they are centralized- that damn centralization that blockchain is trying to fix.
- Tax purposes
In most countries including the US there are capital gains taxes on cryptocurrency assets that appreciate in value and then are sold back into fiat. Exchanges like Coinbase and Binance produce forms at year-end much like brokerages do. Let’s say you bought 0.5 Ethereum once every month, and then sold a few of those ETH at year end- which of those ETH did you sell? The exchanges will be forced to use the FIFO (first in, first out) approach that will maximize the amount of tax you owe. If you own a hardware wallet, you can use your own approach including LIFO (last-in, first out) which would likely minimize your tax bill since crypto increases in value over time.
- Attacks on Exchanges
Exchange servers literally have hundreds of millions of dollars just sitting around in a single place- an attractive target for hackers. Unfortunately security breaches on exchanges have been commonplace- with the most recent hack on a major exchange on KuCoin for $200M+ one year ago. A quick Google search of crypto exchange hacks will give you an innumerable depressing list of exchange hacks. The most notorious of all exchange mishaps was of course Mt. Gox nearly ten years ago- all coin holders on the exchange lost everything. Fortunately, exchanges have improved by miles since then, but they are not infallible. A hardware wallet fixes this issue by being designed in such a way that your private keys never leave your device.
- Wallets still have seed phrases
If you lose your hardware wallet but still have your recovery seed phrase, you can still recover all of your funds if your house burns down and takes your crypto wallet with it. It’s helpful to write your recovery seed phrases down several times and store them in different areas. It’s not like a criminal is going to pay attention to your seed phrases on post-it notes when your house gets burglarized.
- Hardware is fucking cool
Hardware wallets are physical devices that are configured in a way that the private keys never leave the device. I’m old fashioned and like physical gear. Plus there’s something cool about typing my PIN in on the screen of my Trezor Model T and holding buttons down to confirm transactions. It makes me feel like I’m doing something. I know, it’s dumb. Many of these devices have screens that are PIN-locked for extra security. Further, having your crypto not on a centralized exchange captures the true spirit of crypto- that it’s decentralized and cannot be wiped out by one entity like an exchange becoming compromised.
Other alternatives to hardware wallets
As said earlier, having control over your own private keys is extremely important. If you’re not in a position to order a hardware wallet right now, there are plenty of software wallets on the web that you can download- just be very sure you’re getting the apps from the right place. Cardano can be held in Yoroi and several different coins can be held in the Exodus wallet. It’s all about not having to rely on an exchange to protect your funds. Software wallets are great, but your funds are technically at risk anytime your computer is connected to the internet- which is all the time for most of us. Even in today’s day and age malware has been incredibly resilient in being able to bypass security measures.
There’s a reason that the biggest crypto holders (both retail and institutional investors) choose hardware solutions for storing their cryptocurrency- they understand that space is still far from being mature and operating with a level of security on par with institutional banks. Since you’re an early adopter of cryptocurrency- you’ll reap the benefits by getting some of the biggest gains- but you still have to deal with the downsides and growing pains blockchain tech is experiencing. As Cardano’s founder Charles Hoskinson says- “it’ll be like WiFi- someday it will all just work.” Until then, get your coins stored on a hardware wallet.