Holding Crypto Assets Safely
This follows the earlier post: “Getting Started With Crypto Assets”. I’ll assume you’ve been able to purchase some Bitcoin, ETH or perhaps other popular crypto assets, and that these are sitting on some exchange.
Leaving your crypto assets on an exchange exposes you to unnecessary risks. Someone could hack your account, hack the exchange (often an insider job), the exchange could cease operating as a business or even be closed down by a government. You should only leave crypto assets on the exchange when you expect to trade them or perhaps sell them for fiat.
This means that you need a wallet under your own control, and you transfer assets from the exchange to your wallet address. While you may have paid about 1% to acquire the crypto, most exchanges charge only a nominal fee to transfer from one crypto address to another. So moving the funds back and forth doesn’t really impact the value of your asset (unlike moving funds from bank to bank using wire transfers).
I recommend the Exodus wallet, a popular software application which runs on desktop and mobile devices and supports many popular crypto currencies. Just download, install, go through a simple setup procedure and you’re ready to transfer from the exchange back to your own device. Before I explain the setup, let me point out that the wallet does not actually contain any crypto, only a set of public-private key pairs which allow you to access a wallet address on the particular blockchain. In other words, your BTC is stored on the bitcoin blockchain and your ETH is stored on the ethereum blockchain. The public key is the address of your wallet on the blockchain and the corresponding private key is your secret password to spend crypto in your wallet.
When you setup the Exodus wallet, storage for these key pairs is created on your device. To access the storage and use Exodus, you can authenticate either with a long password or by providing a seed phrase (aka ‘recovery seed’). In this way, backing up your Exodus wallet involves keeping both the password and the seed phrase in some other location than the device where Exodus is installed. If you’re using a laptop and it crashes or is stolen, your crypto holdings will be inaccessible. In that case, you would install Exodus on another machine, retrieve your seed phrase from backup and enter it into Exodus. Et voila! You will have gotten control of your crypto again.
Best practice is keep the password and seed phrase in an encrypted volume on a laptop and back that up to Dropbox. But that may be overkill. The minimum you need to do is write down the seed phrase and store the paper somewhere that is safe over the long term. Examples include keeping them with your will, taped behind a painting, in custody of a friend or family member, or stored in a vault at the bank. Your approach will be dictated by the value of your holdings and technical competency. But do not record the seed phrase in a document on your computer, and if you do, be sure you are disconnected from any network before opening the document.
Some investors prefer a Trezor hardware wallet for local storage, instead of software like Exodus. A hardware wallet has the advantage of true ‘cold storage’ because it is not connected to the network unless you are moving crypto into or out of the wallet. But you still need to maintain the seed phrase backup. So now their are two items you must keep secure and separated: the hardware wallet and the seed phrase. I would say this is somewhat impractical for the ordinary investor, unless your wallet contains more than say the value of your home.
The Exodus software will lead you through its setup process, but here are the key points:
1. Install the software.
2. Run for the first time, and it will just show you the various cryptos. Click on the gear in the upper right to access the Settings, then click on ‘Backup’.
3. Create a long and secure password (and write it down for safekeeping).
4. Record the 12 words that make up the seed phrase (and write them down for safekeeping). These are generated by the software and order of the words is important. Exodus also recently added a print feature, so you can just print all 12 words.
5. Next the Exodus software will ask you to verify words in the seed phrase from your backup.
I recommend you perform a ‘fire drill’ to be sure that you have installed and setup correctly. To do this you will send some crypto from the exchange to your wallet, and then restore it from the seed phrase. Let’s assume you have some BTC on the exchange.
6. In Exodus, select BTC crypto currency from the wallet list. Click on receive and copy your BTC wallet address (its public key) to the clipboard.
7. Log into your account on the exchange and select the feature to send BTC. Set the amount to something equivalent to USD 5.00 and paste the wallet address from the clipboard. At this point, you should double check the address and the coin type — be sure you are sending BTC to a bitcoin address, otherwise it will be lost. Click ‘Send’.
8. In a minute or two the BTC you sent should appear in your Exodus wallet. Bravo!
Now the fire drill… we’re going to recover the wallet using the seed phrase.
9. Begin by closing Exodus.
10. Launch Exodus and click the ‘Restore from Backup button’ on the Home welcome screen. You will be prompted to enter the 12 words of your seed phrase, in order from the backup. You’ll also need to create a new passphrase (but you can use the same one as before).
11. If this is successful, you will see the BTC you sent from the exchange in your wallet.
You are now ready to store your crypto safely off the exchange. You can transfer all crypto from the exchange to your Exodus wallet. You don’t have to do this all the time. Many investors use Dollar Cost Averaging (DCA), for example they buy a small amount of crypto each week so they are not exposed to much volatility risk. In this scenario, you might only need to move funds back to your Exodus wallet once every month or two.
As you invest, you will want to watch the market. I recommend using the app Coin360. It provides a market heatmap and you can select an individual currency to see the price history, etc. You can install the app on Android (not sure about iPhone). It’s convenient and free.
Reach out if you have questions, I will be happy to guide you. Cheers.
