Ask CryptoVantage: Should I Secure My Crypto Using the “Horcrux” Method?

Decentralizing Your Crypto Storage Options

Central data centers like Google, Amazon, or Facebook create a single point of failure that is easy to identify and attack. Decentralizing the process through blockchain technology distributes the risk amongst everyone with a copy of the ledger. This forces an attack to require more than half of the network to verify in what is known as a 51% attack. The larger a blockchain gets and the more decentralized it becomes, the harder an attack like this is to achieve.

However, the trade-off for eliminating the requirement of third-party intermediary services is that securing crypto then becomes the holder’s sole responsibility. This creates an inherent risk that most people have never had to address. Users essentially become their own bank or give up custodianship of their crypto when they use certain third parties like exchanges.

Where to Store Your Crypto

Once users have familiarized themselves with the basics of cryptocurrency and blockchain technology, they can begin to buy, sell, and trade crypto. Deciding where to store your crypto is one of the most important steps to fully understanding its potential.

There are many different ways to store crypto and each carry their own strengths and weaknesses. Below, we will list the many different ways that you can store your crypto assets.

Exchanges

Most of the larger exchanges operating today offer their users custodial wallet addresses. As a result, they are an easy on-ramp for users new to the space and often provide additional services and benefits to storing your crypto with them. These can include options for staking, yield farming, referral programs, and crypto credit cards.

There do exist non-custodial exchanges but storing your crypto on exchanges, for the most part, requires giving up custodianship of your private keys. This can be a security risk due to exchanges being large targets for hackers or malicious exchange founders draining users’ funds.

If you feel that you can’t be trusted with your own crypto than an exchange wallet might be right for you.

Hot Wallets

Hot wallets refer to private custodial wallets connected to the internet. They provide additional security over exchanges as they allow users to maintain control over their private keys. In addition, they are an easy way to introduce users to the benefits of self-custody over their crypto and provide good interoperability between crypto projects. The most widely used hot wallet is Metamask.

The main weakness of using a hot wallet is that they are only as secure as the device they are stored on. If the computer you are using becomes corrupted, then potentially, so does your hot wallet. Additionally, users will need to familiarize themselves with the importance of protecting their private key information. If lost, so too is their access to their wallet.

Cold Wallets

Cold wallets operate similarly to hot wallets. They offer users full custody of their crypto with the added security benefit of being completely offline. Cold wallets are the most secure way to store crypto.

The main disadvantages of cold storage wallets are that they do not allow you to access the same reward benefits as exchanges. Additionally, they can be a little intimidating for users. The advantage of taking complete control of your digital assets is unmatched, but so is the responsibility for doing so. Therefore, before engaging with cold storage wallets, users should understand the importance of holding private keys and keeping them in a safe, secure location.

An interesting note is that you can add a cold wallet to secure a hot wallets (such as MetaMask) and potentially get the benefits of both.

Why Split it Up

Whether you are new to the space or an experienced user, dividing up your digital assets among several accounts is beneficial. Some may prefer the easy access that exchanges offer, while others may only want the most secure option of cold storage.

If blockchain technology has taught us anything, it is that centralizing anything creates a central point of failure. For example, if you store all your assets in a custodial exchange and that exchange goes bankrupt or collapses like Celcius, MtGox, or QuadrigaCX then there may be no way to recover your assets. Similarly, if you opt only to use a single private hot or cold wallet to concentrate all your assets, you face a similar dilemma. If all your assets are in one location and you lose access to your private key information, as James Howells did in 2013, then there is no way to recover them.

Are There Downsides?

The primary downside of splitting up your crypto is that you’re introducing more attack vectors for potential hackers or scammers.

In reality the biggest danger might just be that you lose track of where you are storing your crypto. Small amounts of crypto can go missing easily if you don’t track it carefully.

There are plenty of users that prefer to store all their crypto in one, super secure wallet, and basically “set it, and forget it.” Of course if that wallet is compromised, your entire crypto balance is gone.

We suggest taking an approach that works best for you with at least a couple contingencies in place if things go wrong.

Overview

In summary, there’s a risk to storing your crypto assets no matter what medium you choose. Some methods contain higher risk than others, while some require you to shoulder more responsibility.

Using the horcrux approach, you can de-risk storage of your crypto assets. This concept is not about diversifying your crypto portfolio, rather how to secure and protect it from any single point of failure. Each storage solution carries its risks and benefits, but dividing up your assets amongst several locations can help protect you in the long run.