Course 3.4 Crypto Portfolio Diversification - Secure Storage Strategies

Introduction

In our previous lesson, we explored the advantages of building a diversified crypto portfolio. We also discussed the best methods to allocate your investments amongst crypto assets strategically. While the main benefit of diversification is minimized risk, it also improves your returns, protects against volatile markets, and secures long-term growth.

By getting familiar with different allocation strategies and managing a diversified portfolio, you also gain exposure to the crypto market. Once you understand how to create a diversified portfolio, you need to store it securely. In this guide, we’ll explore exactly how to do so. We’ll dive into the best protection methods, how to navigate common threats, and break down real-life crypto cases.

Importance of secure wallets 

With cryptocurrency, you store your assets on a personal digital wallet. You have direct and total control and autonomy of your digital wallet, unlike traditional financial accounts where a bank (or other regulatory body) oversees, controls, and limits what you can do with the account. 

There are multiple types of digital wallets to choose from, but the two main categories are hot and cold. Hot (or software) wallets maintain a constant connection to the Internet and are always accessible online.

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Benefits include: 

• Convenient, 24/7 access
• Fast transactions
• Suitable for frequent training

While disadvantages include:

• Risk of hacking or cyberattacks
• If connected to a service provider, they may hold influence over your wallet (for example, if the app your wallet is on becomes defunct, you might lose access)

They are usually hosted on a crypto app or exchange. A cold (or hardware) wallet is hosted on a device (like a USB), and stored offline. The benefits of a cold wallet are:

• Superior security
• Suitable for long-term storage

Disadvantages of a cold wallet are:

• Inconvenient for frequent use
• Risk of losing funds if the hardware is damaged

Best practices for keeping your cryptocurrency safe

Whether you’re logging in to check the market, making a transaction, or starting a new investment, keep these practices in mind. 

Store your private key and seed phrases securely

You use your wallet’s public key as an identifier, and your private key as a password for your wallet. The private key is a long string of random numbers and letters. If anyone discovers your private key, they can gain control of your wallet and all the assets inside. Storing your private key is just as important as choosing the right type of wallet. 

A seed phrase is the backup for your private key. If you lose it, you can use your seed phrase to access your digital wallet instead. Storing both the private key and seed phrase digitally increases the risk of a malicious actor taking control of your wallet. This includes using:

• Password storage apps/browser extensions
• A digital document/note (even when encrypted)
• A picture or video on your device

The most secure methods are offline, such as by encrypting your private key and seed phrase with a hash, then writing it down and putting it into a physical safe. 

Use two-factor authentication

Even with securely stored passwords, you’re at risk of being hacked. Using two-factor authentication (2FA) adds another layer of security. This could include providing an answer to security questions, getting a code from an email or text message, or using biometrics (like your fingerprint or a facial scan) in addition to your password. Since 2FA requires personal information that most others don’t have access to, it effectively protects against compromised passwords. 

Backup your data

Backing up your wallet data can protect it from being compromised by online attacks, and can even assist in recovering access. Having a backup of your wallet’s data, like the private key, seed phrase, and a record of the funds allows you to gain the wallet back in the case of a system failure. 

Many digital wallet software provide a built-in backup feature so that users can regularly perform backups conveniently. Along with backing up your wallet, ensure that you conduct any system or software updates promptly. These updates often include security patches, barring hackers from taking advantage of vulnerabilities in outdated code.

Only use safe Internet connections

One of the advantages of crypto is how accessible it is. No matter where you are or what device you’re using, as long as you have an Internet connection you can still log in to your crypto accounts. However, using public Wi-Fi greatly increases the risk of cyberattacks. On an unprotected network, bad actors can intercept your logins and other information.

A secured network will usually ask you to agree to certain terms and conditions or create a unique account before allowing you access, along with having a password. It’s also good practice to use a VPN to further conceal your information online. Only use a reputable, highly-rated VPN, and only download your VPN software from an official source.

Recognizing and avoiding common crypto scams

Crypto scams have only become more advanced (and insidious) in recent years. In 2023 alone, over $3.9 billion was lost to scams. Staying aware of common phishing, hacking, and scamming tactics is essential in keeping your crypto investments safe. 

1. Phishing scams

Phishing describes the various methods scammers use to gain your personal information. One common strategy is the impersonation scam; pretending they’re the customer support for a legitimate crypto platform. They will email or message you, claiming that your account is at risk , and direct you towards a link. They may also email claiming you’ve won a giveaway. The link will direct you to an authentic-looking replica of the official platform and will request you to log into your account. Once you do so, the scammers will record your password (or other sensitive data). 

Another common method is the business opportunity scam. This can play out in many ways; you may stumble onto a promising (but fake) job listing. After applying, the job-lister will request you make a crypto payment to get started. Alternatively, they might deposit in your account, claim they sent the wrong amount, and then request you send some of it back. 

They may also contact you directly, claiming they have a profitable investment opportunity that can double or triple your returns. They might also claim they can act as your investment manager, using their ‘expert strategies’ to improve your profits. 

2. Pump-and-dump schemes
   

Pump-and-dump schemes fall into the category of fraudulent crypto. In these scams, a developer team will front their crypto project as the next best investment. They may guarantee returns, enlist influencers to promote it, and create compelling marketing materials to build a large investor base before even launching. 

Once the crypto project launches, the team will ‘pump’ funds into it - making the crypto seem much more valuable than it is. More investors will buy into it, raising prices even further, and then the team will ‘dump’ their shares in the crypto, leaving it to tank. Without a team to maintain and continue developing the project, the crypto will inevitably fail, leaving its investors in the red.

To avoid scams, use the following tips and tricks:

• Before clicking on any links, or replying to emails, messages, or job offers, always verify legitimacy. Make sure to look up the official domain or contact information for the company. For individuals, search for their professional history and ensure they have a strong reputation.
  
  
• Never provide your personal information (like your bank or digital wallet details) to people online.
  
  
• Always use caution before investing. If the project’s team or affiliated members are guaranteeing returns, don’t invest! Legitimate crypto developers never promise anything; they only provide their best predictions or estimations based on market research.
  
  
• Only download software from the official source. Scammers often insert their code into otherwise legitimate software and provide free copies on random websites. This tampered software acts as a digital spy; recording your information or manipulating your actions.

Understanding crypto exchanges’ security measures

Your crypto exchange is vital to your investments’ health! Always choose a reputable exchange with a strong history of transparency and integrity with its users. Exchanges like Walbi value their client’s security and are open about the security measures they employ to protect against fraudulent and malicious activity. 

For example, Walbi uses advanced encryption techniques to protect user data during transactions. Common techniques include SSL (Secure Socket Layer) and TLS (Transport Layer Security) which encrypts communications between users and the exchange. 

Some crypto exchanges offer custodial services for your digital wallet. They act as managers, controlling your investments to improve your returns. They also provide enhanced security for your digital wallet by storing your private keys (often offline or in cold storage) and can support your transactions with advanced cryptography measures. 

Conclusion

We can’t discuss crypto portfolio diversification without talking about secure storage strategies. What good is a diverse portfolio if it’s not safe? 

With the techniques outlined above, including secure password storage, digital wallet management, and crypto exchange measures, you can safeguard your diversified portfolio. 

While reading this guide is a great way to start building your crypto defenses, please continue researching the best storage solutions for your needs. Staying up-to-date on the latest crypto threats is also pertinent to avoid scammers.

If you want to join in the discussion on the best practices to secure your diversified portfolio, share this article with your friends and family!