You've purchased some crypto and it's sitting on an exchange. You've heard horror stories of people losing all their money in exchange hacks, and you're wondering how to keep it safe.

You've got three main options with where to put your crypto:

• Leave them directly on the exchange
• Transfer them to a wallet app
• Transfer them to a cold wallet

This post will go through the benefits and drawbacks of storing on crypto exchanges versus other methods, with the goal of keeping it as safe as possible, but keeping some of your crypto quickly accessible so you can get in and out of trades when the time is right.

Hot and cold

Before we carry on we need to define some terminology.

A wallet (a place to store crypto) can either be hot or cold. A hot wallet is connected to the Internet, and a cold one is not. Cold wallets are considered much safer because hackers cannot infiltrate them unless they have the physical device. Even then it's incredible difficult. With hot wallets they can hack the wallet from a Starbucks on the other side of the world.

And just in case, an exchange is a platform for buying and sell cryptocurrencies. They're akin to platforms for trading stocks, options, or forex (currency conversion), except purely devoted to cryptocurrencies. Although some stock trading apps, like Robinhood, are also opening up to crypto.

Storing on Exchanges

A lot of people store or move fiat money (USD, EUR, GBP, etc) to exchanges in order to purchase crypto currencies. Exchanges store these in banks or use external payment processors or holdings companies. They're generally secure because they're using the traditional banking system.

Many people also store their crypto on exchanges. There are some serious benefits and drawbacks to doing so. Let's start with the benefits of storing on crypto exchanges:

• It's convenient. You don't need to make additional transfers to send your assets to different wallets.
• It's cheaper. Each time you transfer crypto you have to pay a fee. If you don't move them you save on the fees. Also cold wallets can cost $100-200 so storing on an exchange saves that expense as well.
• It allows you to act quickly. Cryptocurrencies can take up to an hour to transfer when the blockchain is busy. These slow speeds generally occur when prices are shooting up or down and people are rapidly buying, selling, and transferring crypto. These are also times when you will probably also want to be trading. For example, say bitcoin starts skyrocketing, and you feel like you want to offload some of your holdings while it's high. You'd then need to do a manual transfer from your cold wallet to your exchange of choice, which could take upwards of an hour. In that time the price of bitcoin can change a lot.

As you can see, there are some great benefits to storing directly on exchanges; however, a lot of people have personal experience with the negative aspects of leaving their currencies on an exchange. Let's go through them now:

• Exchanges hold a lot of crypto. Crypto can be moved around anonymously, and is often used by criminals to make blackmarket transactions. As a result, exchanges are often targeted by hackers to steal large amounts of their holdings to use for illicit purposes.Exchanges don't always use the most secure storage methods for their holdings. For example, the infamous exchange back in bitcoin's early years, Mt. Gox, held all of their cryptoassets in hot wallets. That allowed a hacker to steal approximately $450 million dollars in cryptoassets back when bitcoin was worth around $1,000. That would be a few billion in more recent bitcoin pricing.
• Unlike stock trading platforms, exchanges are often notinsured to protect their users in the event that they either go out of business, or experience a hack.
• Crypto is still in a Wild West state with government regulations slow to catch up. For example, even though the Canadian exchange Quadriga had all of their assets in cold wallets, their wallets were only accessibly by the founder and CEO, Gerald Cotten. While on his honeymoon in India, Cotten suddenly died, leaving the cold wallets completely inaccessible. As investigators dug into it, five out of six of the cold wallets had been emptied out two months prior to Cotten's death, his will was signed 12 days prior to his death, as well as some other shady things. Some people speculate that his death was faked.

All that being said, many exchanges have started investing extremely heavily in security. All of the major ones, like Binance, Coinbase, and Huobi, all store the vast majority of their holdings in cold wallets, making them unhackable.

Some exchanges are creating insurance funds, like Binance, who store 10% of their trading fees as an insurance fund for breaches. (Note this only occurred after Binance experienced a $40 million dollar hack).

Coinbase is unique in that your crypto is stored in hot wallets by default so that you can have quick access to it. For increased security, uou can get them to move some of your crypto to cold storage by moving it to "the vault." By doing so they warn you that, although it will be more secure, you won't be able to trade using it while it's in the vault, and it will also take longer to withdraw. Other exchanges will just put your crypto in cold wallets without telling you and it could take a long time to withdraw it as a result.

Wallet apps

Wallet applications, either online or on your phone have the same negative aspects of storing on exchanges, but they lose almost all of the upsides. It's not convenient, you aren't saving fees, and you can't act quickly. You have to transfer your crypto on and off the exchange to the wallet app and therefore have to pay for the transfer fees, and wait for it to complete.

We do not recommend using a wallet app since there's no true benefit and only downside.

Cold/Hardware Wallets

Cold wallets are generally referred to as "hardware wallets" because they're essentially small computers, that look like a keychain or a USB stick with a screen and a charging port. This hardware wallets' software is completely devote to storing and managing your crypto. All without ever connecting to the Internet.

The method that is uses to send, receive, and store your crypto without an Internet connection is quite complex and is explained in this article.

The benefits of using a hardware wallet:

• It's the most secure. The only way someone can get into your crypto is if they get your passcode and have the physical device.
• They're safe even if you lose it. As long as you save your secret pass phrase (generally a sequence of 16-32 random words) you can restore your accounts on a new hardware wallet even if you lose your first one.
• You control your crypto. You're not at the whim of someone else's security protocols or business.
• You can access your crypto at any time, and see graphs on how your assets are performing. Hardware wallets can store thousands of different cryptocurrencies, and there's no limit to how much it can hold in terms of dollar value. It can have tens of millions of dollars worth of crypto on it. It won't matter.

Some of the only downsides include:

• A hardware wallet is not free. They cost around $55-160. Totally worth it if you're holding thousands worth of crypto, but not if you have $200 worth.
• You'll have to pay transfer fees from the exchange to the wallet and back when you want to trade again. These can be a few cents to a few dollars.
• It takes time to do transfers, and you need the device with you do so. You can't just be at the gym and take advantage of big moves.

For medium to large amounts of crypto that is intended to be held for a long time (HODL'd), a cold wallet is the most secure choice.

Where to buy a hardware

There are two dominate manufacturers of cold wallets; Ledger and Trezor, and they can purchased directly from their websites.

Ledger

The hardware wallet that we recommend is the Ledger Nano X. It's affordable, stores dozens of different crypto, comes with an accompanying app, and it's secure, easy to use, has bluetooth to connect with your phone, and looks like a USB stick made of metal and plastic.

Ledger also sells a cheaper Ledger Nano S which doesn't connect via Bluetooth and instead has to be plugged into a computer in order to access it. We prefer the X because it's easier to use on the go, and is generally more convenient to use. However, if you'll be using it rarely and only at home, the S is a great and affordable option.

Watch out for sales as Ledger likes to put things on sale like a bundle with an X and an S together. This is a good combo where you leave your S at home locked up and have the majority of your long-term holds on it. The X can be used on the go with smaller amounts.

Trezor

Ledger's biggest competitor is Trezor, who make the Model T and the One. The Model T has a color touchscreen (which Ledger's do not) and a slot for a microSD card. Otherwise they two models are the exact same.

Neither Trezor wallet has bluetooth capability, and must be plugged in. They are also made of plastic and generally feel cheaper in build quality than the Ledger wallets. However, the security and core functionality of the Trezor wallets are essentially the same. There might be minor differences in storage abilities of random altcoins, but you'll probably never notice.

Trezor wallets also have an accompanying app, and one benefit is that they also include a password manager app that you can use to store login and password information for different websites and applications. The password manager seems like a random add-on rather than a key feature. Besides, 1Password is a far better password manager, and we'd recommend using that instead.

Note that the links above are affiliate links that will cause Ledger and Trezor to give us a small commission for sending you their way. We don't run ads on this site or sell our own products, and we only make money to cover our costs from affiliate links to products we love, and through donations. If you decide you'd rather purchase a Ledger Nano without the affiliate link, we understand and totally support your decision. But we'd appreciate it if you did use our link.

Wrapping up

In conclusion, we recommend these two methods of storing your crypto:

1. For small amounts, or for amounts that you are actively trading with or want quick access to, leave it on the exchange. Just make sure the exchange is legit, uses cold wallets to store their assets, and preferably one that offers insurance (like Binance).
2. For medium to large amounts that you don't plan to trade for a while, send them to a hardware wallet. Keep them there until you're getting ready to trade with them, then send them to the exchange.

Also if you have large amounts on an exchange ready to be traded, it's safer to spread it out across more than one exchange. That way if one goes down or gets hacked, at least you haven't put everything in one basket.