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What is Cold Storage?

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The creation of cryptocurrency is undoubtedly one of the greatest inventions in recent history. People started to shift from physical monies to digital ones. Bitcoin has been the most used cryptocurrency since its creation in 2009.

However, since this technology is relatively new, there are still a few kinks that users experience - one of which is storage. You can easily lose your digital money if you are not careful. That is why this article will discuss the importance of Cold Storage (and even its counterpart – Hot Storage)

What is Cold Storage?

Table of Contents

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 that is not connected to the internet – thus, it is less prone to hacking and online theft.

Think of it like an old treasure trunk where the only one who has the key and access is you. Common types of cold storage are hardware storage and paper wallets – more about these later. 

Since cryptocurrencies are online digital assets, they are very much 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 your best method 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 your 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 be taking your coins forever for whatever reason it may be. Unless there is 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 that went bankrupt in 2014. The victims who lost their coins are still waiting for a solution to this day.

Do you plan to save your digital assets for long-term holding and not for 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 an extra layer of protection. 

The different types of cold storage

Cold storage or cold wallets also have different forms. Below are the most used cold storage types:

Paper Wallets

First of all, no, this is not an actual wallet made of paper. Instead, this is more of you putting your private key details on paper. It’s more of a note-taking activity.

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 very risky when the keys are a long string of numbers and letters. If you make one mistake writing it down, it will be tough to find out what you did wrong and easily lose your funds. Writing down is much easier when the private key is in the form of a mnemonic seed since those are just words in a specific order. 

 You can also opt to translate these keys into QR codes for faster and easier transactions. Make sure you have a good printer and print the text version as a backup if the QR is unreadable. 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.

Hardware Wallets

These are devices that may look like a USB drive. You can use it to 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 choose to 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 being a CD type of 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 sort of 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. In essence, 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 they need them. 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 very safe in cold storage will take your worries away.  

Cold storage is also a good option if you are into saving or investing. Because of its offline nature, you wouldn’t be able to spend your crypto on unnecessary things easily. 

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