How to protect my cryptocurrency is the one of the first concerns that I hear from people who have not purchased crypto before. Even those who just started buying on exchanges such as Gemini. There’s no denying it, there is more risk in owning cryptocurrencies than holding money in a traditional bank account. Yes, exchanges could theoretically be hacked. If hacked, the coins can be stolen and your money, not backed by the FDIC, can completely disappear. At the surface, this fear alone will prevent many people from investing in cryptocurrencies.

Normally under a government authority such as the United States & the dollar currency, your deposit at insured banks is covered up to $250,000 per depositor. Certainly the FDIC insurance gives a lot of confidence to the consumer that their money will be protected.

To be clear, if you deposit USD and do not exchange it for a cryptocurrency, the USD amount is FDIC insured up to $250,000 per individual on most cryptocurrency exchanges. You will need to check the fine print. Cryptocurrency coins on the other hand, have no central authority and are typically not insured as a bank would be, which is why security is one of the top concerns for people.

Exchange Hot Wallets vs. Cold Storage Wallets

There are two means of how to store cryptocurrencies. One is through the exchanges where you buy and sell, typically called a “hot wallet” or a wallet that is connected to the internet. A hot wallet would be the money which you keep on exchanges like Gemini, Voyager, or Coinbase. Hot wallets are meant to be easily tradable, but are also more vulnerable due to the network based threats.

If the Gemini exchange was to be hacked, the exchange held coins in a users hot wallet could be vulnerable. However, Gemini states, “only a small portion [of crypto] is held on our online hot wallet, which is insured.” Definitely gives confidence, but it is not clear what portion of a users specific crypto holdings are allocated to what type of storage. I would consider any amount of money on an exchange, a hot wallet.

The other option is a “cold wallet,” where you can hold your crypto offline, completely disconnected from the internet. The cold wallet offers a much higher feeling of security. Cold wallets cannot be hacked via a network vulnerability when offline. They provide an advantage in the fact cold wallets are only “hot” when you want them to be. Let’s be real though, you still need to remember where you put the device after you take it offline.

What Exchanges Do to Protect Accounts

Exchanges do provide certain security features with the app itself. The two-factor authentication (2FA) has supported additional user protection over the years. Most of the crypto apps provide two 2FA options and is a nice feature for the sign on of your account. On iPhones, the FaceID is also a common security feature for the device itself, which most apps include. The bottom line is, protecting your user account should be your highest priority.

Companies like Coinbase advertise that 98% of their cryptocurrency holdings from users are held in cold storage and the company will protect the consumer against a hot storage attack. However, a user account security breach is not protected. Still, Coinbase tells you it’s the “safest place to buy crypto.”

There has been instances where companies have been hacked as crypto continues to gain popularity. BlockFi as an example, had to hire a new security chief last year after a hacker was able to penetrate an employees cell phone and compromise a few user accounts. Not a huge story, but again the threats remain possible. For an entire history of cryptocurrency hacks, head over to the SelfKey Blog.

The Best Approach

Overall security is an important topic not only for those who want to get into crypto, but also for those who are in and want to protect themselves.

Don’t put all your eggs in one basket. Diversify your cryptocurrency purchases with multiple exchanges. Take a second to read some of the fine print related to each of the exchanges and pick two or three to spread your investments over.

Many companies are focusing on security because it is necessary. Unfortunately, no one can predict what exchange will be targeted. The best approach is to stay diversified with exchanges similar to how you would approach buying stocks.