Crypto Security 101—3 Key Components of Digital Investing

Many investors are exploring the crypto market. It’s an exciting time with different cryptocurrencies and NFTs that present unique investment opportunities. However, it’s important to understand that this asset class is still in an early adoption phase. There are extra security practices and procedures to be aware of when securing digital crypto assets.

In the first article of our series on crypto security, let’s focus on the three key components of owning crypto assets. Investors must have a clear understanding of how this digital market works before diving in head-first.

1. What is the Blockchain?

The first concept to grasp is how blockchain technology works. The blockchain is the record of all transactions that have ever happened in a crypto space. It tracks where new transactions are added and when they take place. Each cryptocurrency transaction has a sending address (the payer) and a receiving address (the payee). Blockchain technology is very different from traditional transactions like bank transfers and credit card purchases. Blockchain transactions are final once they take place.

Blockchains have no central authority like a bank. Transactions are managed between users. If your crypto were to go to the wrong address, you would have very limited recourse. The decentralized blockchain technology is what makes cryptocurrency transactions very safe compared to a traditional banking system. User data is very well protected. However, this lack of a central authority also means you have to be very careful about each transaction you make. This is true whether you are sending or receiving crypto tokens, NFTs or other digital assets.

2. What is a Wallet?

You can think of your crypto wallet like a checking or savings account. It is your management portal which contains your public and private keys. For now, we will focus only on the private keys when it comes to security issues. Think of these like the PIN for your debit card. Anyone can send you money without need your PIN. If you are sending money from your account, though, you will need to enter it.

The private key works similarly as a PIN. It does not stop anyone from sending a crypto asset to your address, but it is required if you want to send a crypto asset to a different address. Just remember all blockchain transactions are final and irreversible. If a bad actor has access to your private key, they can send your crypto assets wherever they want. Once any fraudulent transactions take place, you will mostly likely not be able to get them back.

3. Custody Options

Custody is when an entity holds and secures your crypto assets on your behalf. This means the custodian has control of your private keys. You log into their platform. Then, you can conduct transactions with your crypto assets however you like. It’s similar to your standard banking, investment and retirement accounts, which are all custodial in nature.

With crypto assets, it doesn’t have to be this way. You can choose to keep custody of your assets. This is known as “self-custody” (some may refer to it as “being your own bank”). Self-custody means that you have control over your private keys, rather than a third-party having that control. There are multiple ways to apply self-custody for crypto assets, which we will address in more detail in the next article of this crypto security series.

Understanding how blockchain technology, wallets and custody work in crypto investing are critical to getting started in this new digital marketplace. For help with all your investment planning needs—including incorporating crypto into a healthy and diverse financial portfolio—contact Illumination Wealth today.

Special thank you to Jacob Phelps, CFP© for providing the source material for this article.