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What is cold storage?
Cold storage is the best way to safeguard your cryptocurrency or digital money. Also known as cold wallets, cold storage is where you put your crypto for safekeeping. It is a device not connected to the internet – thus, it is less prone to hacking and online theft.
Think of it like an old treasure trunk where you are the only one with the key and access. Common types of cold storage are hardware storage and paper wallets – more about these later.
Since cryptocurrencies are online digital assets, they are susceptible to digital harm. So, securing them using cold storage is the way to go. Until traditional banks allow you to store your crypto safely, this is the best way to safeguard your online assets.
What makes cold storage safe?
As mentioned earlier, cold storages are the safest way to secure your cryptocurrencies because they are not connected to the internet. Only you, the owner, have access to it. Keeping Bitcoins and other coins offline minimizes online threats, as hackers cannot access them.
Of course, there are still third-party wallets available to safe-keep them. But the danger with that is that once they go down, they will take your coins forever for whatever reason. Unless a curator is appointed, there is no easy way of getting them back. The biggest event where this happened was the downfall of the cryptocurrency exchange Mt Gox which went bankrupt in 2014. The victims who lost their coins are still waiting for a solution.
Do you plan to save your digital assets for long-term holding, not everyday spending or transactions? In that case, the common best practice is to store them in cold storage. So, putting your Bitcoins in cold storage will give you extra protection.
The different types of cold storage
Cold storage or cold wallets also have different forms. Below are the most used cold storage types:
When you put your private key details on paper, it becomes a so-called paper wallet.
This type of cold storage is usually free. It involves printing your public and private keys on paper or writing them down. The latter could be risky when the keys are long numbers and letters. If you make one mistake writing it down, finding out what you did wrong will be tough, and you will easily lose your funds. Writing down is much easier when the private key is a mnemonic seed since those are just words in a specific order.
You can also translate these keys into QR codes for faster and easier transactions. Ensure you have a good printer and print the text version as a backup for unreadable QRs. Don’t test the QR-code with your mobile phone because the private key can be compromised by malware on your phone, and the whole purpose of the cold storage method is gone.
These are devices that may look like a USB drives. You can store all your cryptocurrencies in a tiny device that cannot be accessed online. The best way to secure it is to put it in a storage facility or a fireproof deposit box.
Hardware wallets are considered the safest among all types. They are virus-proof, and some are even waterproof. You can still use your crypto holding online to send them to another wallet or sign transactions on smart contracts. Only the confirmations of these transactions are sent to the hardware wallet, where you can accept or decline it after reviewing the details on the device’s screen.
Ensure never to enter your private key on a website, app, or anywhere else but in the device itself! The private key won’t be accessible on your computer or phone and is thus safe.
Popular examples of hardware wallets are the Ledger Nano S and the Trezor.
Other Wallet Types
There are other less-known types of cold storage, like sound wallets and deep cold storage. The former is a CD storage where the private keys are encrypted in sound files. The latter, however, is more of a service than a device. It is like an insurance policy for your Bitcoins. A provider will safely keep your coins for you in a bank vault.
There are also products on the market where you can engrave the private key or have a set of letters and numbers to put in the correct order in a cone. These are a bit more similar to paper wallets.
Hot storage vs cold storage
The term cold storage implies that there is also a hot one. Hot storage or hot wallet is a digital cryptocurrency wallet. Hot wallets are either desktop or mobile applications. Holding funds on an exchange wallet is also considered a hot wallet.
The main difference between a hot and cold wallet is that the private key of the cold one is not accessible from the internet. It is more secure since it is less susceptible to hackers and online threats. Since hot wallets are still internet-reliant, they are more prone to cyber-attacks.
On the upside, hot wallets are more accessible and easier to use. Since they are online, cryptocurrency users can easily access them whenever needed. Another advantage they have over cold storage is that they are usually free.
However, if you think of long-term use and an extra layer of security, investing in good cold storage is your best choice. Sure, hot wallets are more accessible, but knowing that your Bitcoins and other digital assets are safe in cold storage will take your worries away.
Cold storage is also a good option for saving or investing. Because of its offline nature, you won’t be able to spend your crypto on unnecessary things easily.