Holding cryptocurrency assets in the modern day means strengthening your account to ensure there are fewer chances of it being hacked, but what if one account isn’t enough to safely store your assets? While it is efficient to start with one account as a beginner, as you grow your portfolio, it would be best to segregate your crypto, which will help minimize risks in the long term.
This means leveraging multiple wallets or accounts where you store assets so that, in the event of one falling, you are still saving a significant part of the portfolio. Asset segregation works well with strategies like checking the Fear and Greed Index, which will let you know the general market sentiment that can be either panic (heavy selling) or excitement (intense buying). Checking these stats will help better allocate assets within portfolios and secure them before any significant events.
But let’s learn more about why you should segregate your cryptocurrency.
Why Is One Account Not Enough?
When you hold your assets in one account or wallet, you expose your assets to risks in the case the exchange goes bankrupt. In 2022, when the FTX exchange collapsed and eventually went bankrupt, customers and investors lost their assets in matters of billions of dollars’ worth of cryptocurrency. And even if they recovered their money afterward, the process of compensation took some time to complete.
So, holding all your money in one wallet, especially if it's years’ worth of investments, is not a good idea if something happens with the exchange. That’s why you must allocate your assets across multiple accounts or wallets to minimize the impact of such an event and still continue to build wealth over time.
The Benefits of Asset Segregation
The first and most important benefit of asset segregation in crypto is that it protects your assets in case of insolvency or bankruptcy, which is why it’s ideal to concentrate your cryptocurrency across two or three wallets that can be both hot and cold for another layer of security. In hot wallets, you store your cryptocurrency in a centralized exchange that facilitates access, but since this happens through the internet connection, you also expose yourself to cyber-attacks.
But when you have multiple cold wallets where your crypto is safely stored, you can rest assured that no hackers can reach it, but you’ll have to be more careful about where you store the wallet to avoid losing it. You can also try to leverage separate wallets based on certain purposes, so a cold wallet is best for long-term holdings, while a hot one is ideal for daily spending.
Is It the Same as Portfolio Diversification?
No, asset segregation is not the same as diversifying your portfolio because diversification focuses on allocating your funds across different industries to minimize volatility, while segregation means holding assets on multiple wallets. Therefore, you need to diversify your cryptocurrency across all wallets to ensure they reach maximum productivity and are safe against massive price spikes.
Asset diversification is necessary regardless of your expertise level with digital assets because it helps even with changes in prices. Investing in established coins like Bitcoin or Ethereum is a good start, as these coins have proven more stable over the years than other types of coins, but you also need developing assets whose contribution to the market is significant due to their technological breakthroughs. You can also try investing in AI coins, blockchain projects, and stablecoins to bring more value into your portfolios, regardless of the wallets they are stored in.
Practice Caution When Using Multiple Accounts
While creating multiple wallets and having your crypto stored on them is easy and accessible, you must learn how to organize them to avoid possible issues like those with asset management. Having multiple wallets raises the risks of sending crypto to the wrong network or forgetting which addresses belong to which wallet, so losing funds is possible in these cases.
You must also prepare for taxation since transferring crypto between your wallets can be seen as sales or purchases, so if you’ve got multiple wallets, it might be useful to get a financial advisor or lawyer who will help you stay on top of your tax reports. This is especially necessary considering the changing regulations on crypto across the world, and some assets are seen as securities while others are commodities, so they have different legislation.
Should You Switch to a Non-Custodial Wallet?
Besides holding your cryptocurrency in centralized exchanges, you have the option to get a non-custodial wallet, which offers you full control but lacks the security of a regular digital wallet. This is a type of software that can take the form of a mobile app, a browser extension, or a hardware device where you keep your private crypto keys and no other third parties are involved in the ownership process.
That doesn’t mean these wallets are not protected; they offer encrypted key storage, biometrics, and multisignature setups that prevent compromising attacks from affecting your crypto. However, the only and biggest disadvantage of non-custodial wallets is the fact that losing the recovery phrase means you may never regain access to your cryptocurrency. On the other hand, centralized wallets may still be able to recover your money in certain cases.
That’s because these wallets operate on blockchains, and all operations on decentralized ledgers are irreversible, making it your responsibility to protect the assets by backing up your recovery phrase in at least two secure places such as a deposit box or a fireproof metal box. Avoid storing seed phrases and private keys on a piece of paper, a screenshot, or even in the cloud, as these methods are easy to compromise.
Conclusion
Investing in cryptocurrency comes with benefits and challenges, and one risk you need to prepare yourself for is losing your assets because you stored them all in one wallet or account. That’s why you need two to three wallets to separate your cryptocurrency and ensure that even if one exchange goes bankrupt, the other two are storing your money. Try to separate them into hot and cold wallets to enhance security, and practice caution when it comes to asset management and taxation.
