Crypto Wallets: How Secure is too Secure?
With crypto, one can never be too paranoid. Every other day there's a new DDOS attack on an exchange. It's recommended to store your coin in an offline wallet, or even better- a paper wallet that you then store in a safe or a safe deposit box (ew, banks). But what about the hundreds of people who have either reformatted their hard drives, thrown away their hard drives or misplaced their passwords and now have no access to their money?
There was one man in Australia who threw away a hard drive with $4.3 million on it. Imagine having to live with that weighing on your soul. Wouldn't you rather lose it to a hacker?
That being said, one exchange (although I use that term lightly) called Coinbase claims to insure all cryptocurrency and if you're a US citizen, then your USD is also covered by FDIC. Web wallets are less secure than offline wallets, but there's a chance of being able to recover your password if you forget it. Plus, it's kind of difficult to accidentally throw away your account.
There is a relatively new device called Ledger which supports BTC, LTC, ETH and several other altcoins. The original kind of looks like a brick but this nano one is pretty compact and convenient. https://www.ledgerwallet.com/products/ledger-nano-s
The device is kept in "cold storage" meaning it's not plugged into your computer, therefore inaccessible to hackers. When it is plugged into your computer, it then requires a 4 digit PIN. So basically it's a flash drive or external HD with a PIN number. I think a 4 digit PIN would be a lot easier to remember than a wallet passphrase. Of course, I would still store it in a safe on top of that as an extra layer of security. The only real downside I can see to the Ledger Wallet is that the price is a bit up there for most of us.
I would have to say that the most secure ways of storing your crypto if you're not actively trading it would be either the Ledger Wallet or a paper wallet- both of which should then be stored in a safe or safe deposit box. The downside to the paper wallet- as of right now, you need a different paper wallet for each crypto and some of them don't have the best version, including Ethereum (surprisingly). And of course the downside to the Ledger is the price. I'm looking forward to more devices like the Ledger that are more affordable and have cooler forms of authentication. Like a biometric scanner.
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Not sure I trust any piece of custom hardware not to fail randomly. A regular air gapped computer works for me, but I think that level of security is way beyond most people, too easy to screw up.
Most people should probably it's something like Coinbase - but unfortunately there is no company with the level of security and guarantees that Coinbase has AND accepts all the random new coins we want to invest in.
A multi sig wallet with someone you trust might be an alternative - but how many trusting relationships were ruined by a big pile of cash there for the taking? And it makes hostage situations more likely... That trusted partner could be a bank entity if you trust banks. I'm pretty sure that will have to be the case eventually if crypto goes mainstream or people will regularly be losing life savings because they forgot a password, got hacked or otherwise coerced into revealing it.