While Bitcoin is quickly becoming widespread across the world and being adopted more and more each day, rumblings of how it is going to be handled continue to rise. While Bitcoin unlocks a lot of potential in digital currencies and the world economy in general, it also creates some challenges when it comes to determining how to store this new asset and how to treat it as a currency or asset. There are several options today for custody of digital assets and to fully understanding how Bitcoin is going to work in this new paradigm requires knowledge of these types of custody and how they are being executed now as well as how they plan to be carried out in the future.
What complicates the matter of digital assets custody is the spirit and purpose that surrounds the digital assets, the fact that most people that own digital currency consider their privacy to be of paramount performance. This makes the topic of custody even more complicated and confusing when it comes to what is acceptable and what is not in the storage of digital assets. This analysis of custody methods for digital assets will give you the insight you need into this new topic.
Hot Storage
Hot storage is perhaps the most popular method of storage of digital assets both among long-term owners of cryptocurrencies and those that are new to cryptocurrencies. This is for a number of reasons. The most obvious reason is that hot storage is often the most simple way to store cryptocurrencies and for that reason, many people gravitate towards it for convenience.
All it takes to use hot storage is possession of a wallet, a sending address, and specification of amount. You can quickly and easily send and receive coins. However, this also does leave some vulnerabilities. The whole concept of a “hot wallet” is that it is left on the network and can be accessed easily. Unfortunately, this also leaves the potential for it to be accessed by someone other than yourself. Though this is rare, it is more common than what you would see in some other, more secure methods of storing digital assets.
Hot storage remains the biggest key to gaining users on a widespread basis and for that reason, it has an optimistic and bright future ahead.
Cold Storage
If storage and security are a large priority to you and you hold digital assets, then you have probably already heard about what cold storage is and what it has to offer. Cold storage is the premier way to store digital assets that you don’t need to handle for a long time or that you want to protect with the maximum amount of security. The whole concept of cold storage and how it works is the main reason that it is so secure and so successful in keeping digital assets safe.
The main benefit of cold storage when it comes to security is that cold storage wallets are generally kept off the network. This means that you can disconnect it from any other electronics and store it physically in a location that only you can access and that nobody can remotely access. This option is very popular among those that know how to configure wallets and have a more technical knowledge of digital assets.
Collateralization
Collateralization is not a new concept, but it is rather young in terms of how long digital assets have been used in collateralization. Collateralization refers to the practice of leveraging your digital assets by lending them out or putting them up against some sort of collateral such as real estate and other physical assets. Not only can this produce a return, but it also puts a real dollar amount on the value of your digital assets. However, it also leaves the value of your tokens vulnerable to drops. This isn’t a new concept to cryptocurrency and digital asset holders, but it’s something you should be aware of nonetheless.
Collateralization gives relatively little control over the storage and security of your assets, but they are generally watched over by heavily reputable professional companies that specialize in facilitating these transactions.
Derivatives
If you are the investor type that wants to leverage your digital assets or trade them for profit, then derivatives is what you’ll be dealing with. Derivatives are generally considered to be a pretty secure way to store coins, depending on which platform you are using to trade derivatives of your digital assets. Mainstream exchanges and trading platforms should perform fine, but small-time exchanges that aren’t registered could disappear at any time and offer very little safety. Additionally, cryptocurrency exchanges are known for being hacked.
Overall, you should be safe if you are keeping coins on a large cryptocurrency exchange, but you should always avoid using exchanges as long-term storage.
Written by Fredrick Roberts, CNIR Staff
