In general, you do not need your own cryptocurrency wallet for Bitcoin, but it might be useful in some circumstances.
Bitcoin can be purchased at a number of outlets, but how should it be stored? The Bitcoin can be kept in the same place that you bought it. For example, if you purchased a Bitcoin via Cash App, you may hold it in your Cash App account for as long as you like. If you prefer, you can keep your Bitcoins and other cryptocurrencies in your own wallet. Our goal in this article is to analyze the security risks of both options, and determine whether a separate cryptocurrency wallet is necessary.
Alternative 1: Leave your Bitcoin in your wallet
Bitcoins should generally be left at the exchange or brokerage from which they were bought. Despite the fact that security protocols vary by exchange, the following three types of security are employed by most top cryptocurrency exchanges:
- In most exchanges, most Bitcoins in customer accounts are stored in cold storage, which means they are stored in wallets not connected to the Internet. Such Bitcoins are not vulnerable to hackers.
- The majority of exchanges keep at least some Bitcoin in hot wallets (internet-connected), ensuring that customers can buy, sell, and transfer their digital currencies with enough liquidity to do so. In the unlikely event that this Bitcoin is stolen, an exchange usually has an insurance policy to protect their customers.
- The funds that your exchange holds in custodial accounts at FDIC-insured banks are also safe, so your cash balance is also protected.
In the event, your account is hacked and your Bitcoin is transferred without authorization, none of these security measures will protect you. It is important to protect your passwords, as well as your authentication mechanisms when holding Bitcoin at an exchange since they are fairly safe from hacking incidents. Ultimately, once someone transfers bitcoin out of your account, it’s gone.
Alternative 2: Create a bitcoin wallet of your own
Using a Bitcoin wallet is technically the same as leaving your Bitcoin with an exchange. It’s called a custodial wallet because your funds are held by a third party.
You can also get your own Bitcoin wallet, which gives you complete control over your Bitcoin and its security keys (private codes proving ownership). You can further divide the Bitcoin wallet into different categories.
- A computer-based wallet is a software wallet. Despite the fact that you own your Bitcoin, you remain vulnerable to hacking if you have an internet connection on your computer.
- Using a hardware wallet: Storing your Bitcoin on physical hardware (such as a portable hard drive) virtually eliminates the risk that you will be attacked.
- Paper wallets: You may store your bitcoin keys on paper, but they are prone to lose.
Do you require a cryptocurrency wallet?
The answer is not straightforward. As long as you take adequate precautions to safeguard your passwords and other authentication methods, leaving Bitcoin in the custody of the exchange is completely safe for most people. For those who have a large amount of Bitcoin, or simply want to ensure the safety of their digital currency, a Bitcoin wallet can be a valuable tool.