Don’t Put All Your Eggs In One Basket

The proverb rings true for your crypto assets.

Every facet of life begs the importance to stay diversified and not have too much of one thing. Whether it be your diet, your hobbies, your bank accounts, your friends, and etc. This age old proverb should also be applied to your crypto assets. And as we’ve witnessed many many times, crypto wallets and exchanges are vulnerable to unfortunate mishaps.

Diversifying your crypto assets across multiple wallets is an essential strategy in the world of cryptocurrency for several important reasons:

1. Security: The most critical reason for diversification is security. Storing all your crypto assets in a single wallet or exchange account creates a single point of failure. If that wallet or exchange is compromised or experiences a security breach, you could lose all your assets. Diversifying across multiple wallets reduces this risk. Even if one wallet is compromised, your other assets remain secure.
2. Risk Mitigation: Different wallets have different levels of security and vulnerability. By using various types of wallets, such as hardware wallets, paper wallets, mobile wallets, and exchange wallets, you spread your risk. Hardware wallets, for example, are known for their high security, while exchange wallets may be more vulnerable.
3. Avoiding Exchange Risk: Many cryptocurrency users leave their assets on exchanges for convenience. However, exchanges are centralized entities and are susceptible to hacks, regulatory changes, or insolvency. By moving assets off exchanges and into private wallets, you reduce the risk associated with centralized platforms.
4. Privacy: Some users value privacy and anonymity when it comes to their cryptocurrency holdings. Different wallets offer different levels of privacy. By using multiple wallets, you can separate your holdings and transactions, enhancing your privacy.
5. Access and Redundancy: Diversifying across wallets ensures that you always have access to your assets, even if one wallet becomes temporarily inaccessible or you lose access to it. Having redundant access points can be especially crucial in times of emergencies.
6. Asset Management: Diversification allows for better asset management and organization. You can categorize your assets for different purposes, such as long-term holdings, trading, or spending. This helps you track your investments more effectively.
7. Legacy Planning: Planning for the transfer of assets to heirs or beneficiaries is essential. Having assets stored in multiple wallets, and providing access information to trusted individuals, ensures that your cryptocurrency holdings can be passed on in case of unforeseen events.
8. Avoiding Overreliance: Placing all your assets in a single wallet or exchange can lead to overreliance on a single service provider. If that provider experiences downtime, maintenance, or withdrawal limitations, you may find yourself unable to access or manage your assets.
9. Geographical Diversification: Storing assets in wallets in different geographic locations can protect against jurisdiction-specific risks, such as regulatory changes or government seizures.
10. Adaptability: The cryptocurrency space is continually evolving. Different wallets may offer features or integrations that others do not. By diversifying, you can adapt to changes in the cryptocurrency landscape more easily.

One could make the argument that having your keys backed up is crucial to your security. Of course, there is nothing wrong with creating an informed contingency plan against loss. A backup hedges against uncontrollable things like the hypothetical wild jaguar who bafflingly decided to turn your cold wallet into a snack. If that ever happens to you, no doubt it will come as a great relief for you to have not only escaped with your life but to have continued access to your crypto assets. However, it is important for one to not have any misguided notions on the function and limitations of a backup. Ultimately, a backup mitigates losses to accidents at the cost of increasing exposure to malign actors.

There is an old truism involving not placing all of one’s eggs in one basket. This is especially true when it comes to crypto asset storage. Would it be preferable to store 100% of one’s assets in a wallet and then create a contingency backup for it, thereby creating two copies of it? Or is it preferable to have two wallets each holding half of one’s assets? The latter option compartmentalizes your losses in the event that a malign actor does find access to one set of your private keys, while maintaining the same total surface area of risk. The former option would result in a complete loss of funds.

In summary, diversifying your crypto assets across multiple wallets is a fundamental risk management strategy that enhances security, reduces vulnerabilities, and provides greater control and flexibility over your cryptocurrency holdings. It’s an essential practice for anyone involved in the cryptocurrency space, whether you’re a long-term investor or an active trader.