The Risks of Holding Keys for Your Crypto IRA | Learn

Do you currently invest in crypto?

If so, you may have heard of the saying, “Not your keys, not your crypto,” a phrase used to describe having control of private keys to secure digital assets. This approach is known in the world of blockchain and crypto, but this method of storage comes with its risks.

As Crypto IRAs gain popularity, some companies offer storage methods where you “hold your keys”. But questions arise, and the answer may be a bit complex.

Can you, and should you, apply the same principle of holding your private keys when it comes to your retirement investments in crypto?

This is a critical question, as following this method without a proper understanding of the implications may expose investors to substantial risks.

We will explore the topic surrounding private key management in Crypto IRAs, providing a comprehensive overview of the associated challenges and introducing safer alternatives for secure crypto asset management.

Navigating the World of Crypto Wallets

Before we dive into the specifics of “holding your keys”, it's crucial to understand the role of crypto wallets in managing digital assets. Think of a crypto wallet not as a traditional wallet that physically holds money, but more like a digital safe. The assets themselves aren't stored within this safe; rather, the wallet holds the combination (cryptographic keys) needed to access and manage these digital assets. Just like knowing the combination to a safe gives you access to whatever is inside, having your cryptographic keys lets you access and control your crypto assets.

Custodial vs. Non-Custodial Wallets

It's important to understand the distinction between custodial and non-custodial wallets. Custodial wallets are managed by third parties, such as an exchange, which means they hold and secure the private keys of your account. This setup is similar to having a bank manage your funds, due to its simplicity, it might be more secure for those unfamiliar with alternative crypto security practices.

On the other hand, non-custodial wallets give you full control over your private keys. This setup requires you to take responsibility for the security of your keys and assets. With non-custodial wallets, there are two common types: hot and cold wallets.

What happens if you forget your password?

We’ve all been there before, you go to log in to an account and your password doesn’t work or you forgot it. As frustrating as this may be, typically there's a “forgot your password” button that you click to simply reset it. This is the standard method to recover a password in regard to custodial accounts.

Non-custodial wallets present a significant challenge due to their complex nature, especially with the real possibility of permanently losing access to cryptocurrency holdings. Unlike traditional accounts, these wallets don't offer a "forgot your password" option. The responsibility of remembering the password and seed phrase (private keys) lies solely with the asset holder. Numerous cases exist where individuals have either forgotten or misplaced their seed phrases, leading to total loss of their assets. A notable example is that of James Howells, who inadvertently threw away a hard drive containing his seed phrase, resulting in the loss of Bitcoin worth $265 million. Despite his relentless efforts and countless sleepless nights, he has been unable to reclaim his lost crypto fortune.

Hot Wallets: Online and Accessible

Hot wallets are online, connected to the internet, and provide a user-friendly way to manage your crypto. They can be in the form of web-based wallets, mobile apps, or desktop software. While hot wallets offer convenience and easy access, they are also more susceptible to online attacks, phishing scams, and other security threats.

Cold Wallets: Secure but Less Convenient

On the opposite end of the spectrum are cold wallets, which are offline and provide a higher level of security. Hardware wallets and paper wallets fall into this category. Cold wallets are immune to online hacking attempts but can be more complex to use and are at risk of being lost or damaged physically. Also, a commonly known risk is losing your seed phrase which can result in never being able to access your crypto assets again.

Now that you have an understanding of the different types of wallets, let's go over the foundation of crypto keys and the blockchain.

Understanding Crypto Keys and the Blockchain

Crypto operates on a decentralized network, ensuring a secure and transparent record-keeping of transactions. At the heart of this system is the blockchain, functioning as a digital ledger that logs every transaction that occurs in the blockchain network.

When discussing crypto keys, think of them as the essential tools required to interact with the blockchain, and to do so, you need to use a crypto wallet.

Just as a locksmith would need specific keys to access different locks, crypto users need their unique keys to access and manage their digital assets on the blockchain. Within your crypto wallet, there are different types of keys, each serving a unique purpose.

Public Keys: These are like your mailing address; you can share them with others so they can send you crypto. The public key is derived from the private key and is used to create a wallet address, which is then hashed for additional security.
Private Keys: This key should remain confidential and is used to access and control your crypto holdings. It's similar to the key to a safe deposit box; whoever holds it has access to the valuables inside. In the realm of crypto, losing your private key means losing access to your digital assets.
Seed Phrases: These are a user-friendly representation of your private key, usually consisting of 12 or 24 words. They need to be kept in a safe place, as they can be used to recover your wallet if your computer or smartphone is lost or damaged.

Crypto IRA - Hold Your Keys Method

When exploring options for a Crypto IRA, you might come across a method that allows you to "hold your keys". This approach is an alternative way to keep your assets custodied within your retirement account.

By choosing the "hold your keys" method, you are taking on the role of safeguarding your private keys, the critical pieces of information that allow access and control over your crypto assets.

However, this approach comes with significant responsibilities and potential pitfalls.

It's hard to imagine the risk involved in the “hold your keys” approach, where misplacing or forgetting your seed phrase could jeopardize your entire life savings.

The Specific Risks of Holding Keys in a Crypto IRA

Opting to hold private keys within a Crypto IRA introduces unique challenges and risks, necessitating a deep understanding of blockchain technology and security practices.

The Burden of Responsibility

Managing your private keys in a Crypto IRA isn't straightforward. When using the method of “holding your keys” for a Crypto IRA, you're in charge of keeping your seed phrase safe. This responsibility means protecting them from online threats, like hackers, and being careful not to lose or forget them. Missteps in handling these keys can lead to permanent loss of access to your crypto assets.

Irreversible Consequences:

Unlike technical challenges, the burden of responsibility is more about the mental and emotional weight of managing significant assets on your own. It's the constant awareness that the safety of your retirement savings rests entirely in your hands. Any mistake, no matter how small, could lead to irreversible consequences. This responsibility can be particularly stressful, knowing that there's no safety net or institutional support to fall back on, as there would be with traditional IRAs.

The Challenge of Self-Reliance:

In a Crypto IRA where you hold your keys, you become the sole guardian of your digital wealth. This self-reliance demands not just a technical capability but also a readiness to confront and manage the associated risks independently. Without the backing of financial institutions or professionals, you are the final line of defense against any threats to your crypto assets.

Is there a Safer Alternative?

Investing in a Crypto IRA doesn't necessarily mean you have to manage your own private keys. There are platforms available that provide a more secure and simplified experience, removing the burden of key management from the investor.

Benefits of Not Managing Your Keys

One of the primary advantages of opting for a Crypto IRA that doesn't require personal key management is enhanced security. Private keys are complex and can be difficult to manage securely, especially for those who are not tech-savvy. By choosing a Crypto IRA platform that manages these keys on your behalf, you can significantly reduce the risk of loss due to mismanagement or theft.

In addition to security, these platforms ensure strict adherence to various regulations, providing an additional layer of protection and confidence for investors. They implement robust security protocols, and assets are held "off-balance sheet," meaning they are never commingled with the company's operational funds. This separation ensures that client assets are safeguarded even if the company faces financial difficulties.

A Reputable Provider: iTrustCapital

There are a few reputable providers in the market, such as iTrustCapital, that offer a wide array of crypto asset selections along with secure Crypto IRA solutions. iTrustCapital, for instance, provides a tailored solution for Crypto IRA management, ensuring that your digital assets are managed securely and efficiently. It takes care of the technical aspects of crypto investment, allowing you to focus on your investment strategy. Most importantly, iTrustCapital has an off-balance sheet approach, ensuring its client's assets are never commingled with business operations.

Want to learn more about our platform? Read the articles below!

Top 5 reasons to open a Crypto IRA at iTrustCapital

The Benefits of an IRA

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DISCLAIMER

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.

Some taxes and conditions may apply depending on the type of IRA account. Investors assume the risk of all purchase and sale decisions. iTrustCapital makes no guarantee or representation regarding investors’ ability to profit from any transaction or the tax implications of any transaction. iTrustCapital does not provide legal, investment or tax advice. Consult a qualified legal, investment, or tax professional.

iTrustCapital makes no representation or warranty as to the accuracy or completeness of this information and shall not have any liability for any representations (expressed or implied) or omissions from the information contained herein. iTrustCapital disclaims any and all liability to any party for any direct, indirect, implied, punitive, special, incidental or other consequential damages arising directly or indirectly from any use of this information, which is provided as is, without warranties.