In our previous article, we mentioned the phrase “not your keys, not your crypto” and examined the mindset behind holding assets on an exchange versus off an exchange.
Crypto investors can explore alternatives to depositing their assets in a centralized exchange. These alternatives include keeping your holdings in a hot wallet or taking them offline completely, via cold storage in a hardware wallet.
Nonetheless, the practice of self-custody can also bring certain risks to investors. In this article, we will explore the functions of a hardware device and the potential hazards associated with it.
What is a Hardware Wallet?
A hardware wallet is a cryptocurrency wallet programmed to store private keys offline separate from an internet connection. These types of wallets are essential for investors who want self-custody of their assets, instead of relying on an entity that holds the assets. This exemplifies the practice of the widely adopted crypto principle, “not your keys, not your crypto”.
How Does it Work?
The process of initializing a hardware wallet usually involves the user noting down a seed phrase, composed of 12 or 24 words, and securely storing it. While the assets are housed in the blockchain, an investor requires the device itself to access or transfer their crypto. In case of device loss, a new hardware device can be set up, and the assets can be retrieved using the previously stored seed phrase.
While hardware wallets provide an extra layer of security by keeping your private keys offline and out of the reach of potential online hackers, they are not without their drawbacks.
- Physical Loss or Damage: Hardware wallets can be physically lost or damaged, which could lead to an irreversible loss of funds if proper backups are not maintained.
- Seed Phrase Storage: These wallets rely on the user to record and safeguard a 12-24 word seed phrase that allows recovery of assets. If this phrase is misplaced, forgotten, or destroyed the cryptocurrencies associated with the wallet may become irretrievable.
- Theft of Device: Hardware wallets can be subject to physical theft, and while the cryptographic protection mechanisms make it difficult for thieves to access the funds, it's not impossible with enough time and resources.
- Not User Friendly: Hardware wallets are not easy to set up and use.
How Can I Mitigate the Cons
While hardware wallets may seem like a more secure strategy for storing your crypto assets, they can also carry inherent risks for individuals unfamiliar with the significant responsibilities of self-custody. This approach is more suitable for the more advanced crypto investor who understands the intricacy of operating these devices as compared to newcomers taking their first steps in the industry.
At iTrustCapital, we place the utmost importance on safeguarding our clients' assets thereby alleviating the pressures associated with managing hardware wallets. We use a regulated custodian and a third-party liquidity provider to ensure that client assets are never mixed with our operational funds. This guarantees that all assets are held Off Balance Sheet on a 1:1 basis. Our business practice prioritizes transparency and security for our clients and their assets, assuring that clients' funds are always secure.
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This article is for information purposes only. It does not constitute investment advice in any way. It does not constitute an offer to sell or a solicitation of an offer to buy or sell any cryptocurrency or security or to participate in any investment strategy.
iTrustCapital is a cryptocurrency IRA software platform. It is not an exchange, funding portal, custodian, trust company, licensed broker, dealer, broker-dealer, investment advisor, investment manager, or adviser in the United States or elsewhere. iTrustCapital is not affiliated with and does not endorse any particular cryptocurrency, precious metal, or investment strategy.
Cryptocurrencies are a speculative investment with risk of loss. Precious metals are a speculative investment with risk of loss. Cryptocurrency is not legal tender backed by the United States government, nor is it subject to Federal Deposit Insurance Corporation (“FDIC”) insurance or protections. Clients do not receive a choice of custody partner. The self-directed purchase and sale of cryptocurrency through a cryptocurrency IRA have not been endorsed by the IRS or any regulatory agency. Historical performance is no guarantee of future results.
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