Since the first block of bitcoin was mined in January 2009, cryptocurrency has transformed from an obscure, experimental corner of the market to a mainstream investing option. Famous for its highs and infamous for its lows, cryptocurrency has become a fast-moving, fascinating, and permanent corner of the market, which means many advisors who may have once dismissed cryptocurrency as a legitimate investment option are being asked to reconsider it by eager clients ready to take on a little risk. This year, one in four advisors have indicated that they have considered adding cryptocurrency to client portfolios—a massive increase from the historical 0–2%. However, in order for advisors to have confidence in cryptocurrency as a sound client portfolio option, it is important to know how to do more than trade cryptocurrency; advisors must also understand how to securely store it.
While cryptocurrencies like Bitcoin solve many unique technological challenges that have made entirely digital currencies infeasible before, they also come with unique challenges for securely storing cryptocurrency. For instance, unlike funds that are transferred via ACH and can be retrieved in the event that they were accidentally transferred between the wrong accounts, there is no central authority that can undo an accidental cryptocurrency transaction. Cryptocurrency is traded using public and private keys, which allow cryptocurrencies to be received and spent, respectively. While public ‘receiving’ keys can be used, generated, and distributed on a case-by-case basis without any personal risk, private ‘sending’ keys need to be securely guarded. If someone is trading in large amounts of cryptocurrencies, then the risk is even higher and the keys will need to be safely stored in what is referred to as a ‘wallet’.
So what is a safe option, then, for cryptocurrency storage? There are a wide range of storage options. One challenge with cryptocurrency storage is that the sophistication of the storage strategy used needs to also match the technical sophistication of the user, as there’s a genuine risk of losing funds in the event that someone doesn’t quite know what they are doing. In theory, one of the most secure methods possible is what’s known as a ‘paper wallet’- which refers to a wallet generated fully offline and stored in a physical format. However, the challenges of actually generating a paper wallet fully offline and some technical aspects of how Bitcoin transactions actually work make paper wallets a poor choice for most users. At the same time, despite the ease of use available from some wallets that can be installed on a computer, storing keys on a computer that has ever been connected to the internet is also a bad idea since it is best to assume that any such computer has already been compromised. Thankfully, there are two general solutions advisors can give to their clients or use themselves. For the less tech-savvy advisor, using a reputable exchange or storage provider is emerging as a lower-risk solution—particularly as more mature firms are developing in this space. Such storage violates an ‘old’ cryptocurrency adage of “not your keys, not your coins,” since it is true that the service provider does have the ultimate control of the funds, but for someone who otherwise would have limited ability to secure their funds, this may still be a better alternative, particularly if features such as 48-hour waiting periods are added before transactions can be made. However, for the slightly more tech-savvy user, hardware wallets are likely the ideal balance between security and the technical sophistication needed to implement a strategy. Hardware wallets are single-purpose computing devices that are designed solely to store keys. The single-purpose nature of hardware wallets means that they can be used without fear of being compromised, even if a user is interacting with the wallet through a compromised computer. While there are some basic standards that users would want to ensure a hardware wallet meets, quality hardware wallets use a combination of security features that help ensure that someone’s coins are safe and retrievable even in the event that their hardware wallet is lost or stolen.
At the end of the day, cryptocurrency is likely here to stay and will only receive more attention in the future. As a result, if someone is going to own cryptocurrency, appropriate security measures need to be taken to address the unique nature of these assets. Importantly, though, as the amount invested grows, so too does the need to safeguard those investments. This is especially true for those who are looking to invest not only for themselves, but also for others. The good news is that ultimately, with a little bit of research, advisors can find a secure storage option that opens up an entirely new side of investing for their clients (and even themselves)!