What is Cold Storage in Crypto?

Cryptocurrencies are a popular and decentralized option, but they also pose a security risk. It is the responsibility of the owner to keep them secure. A new generation of software has emerged that looks for the digital wallet where virtual currencies are kept. If your cryptocurrency is lost or stolen, there is no one to contact. 

Many crypto enthusiasts who are concerned about security have turned to cold storage to keep their coins safe.It is widely used by major cryptocurrency exchanges as well as some of the most successful companies operating in the space behind the best cryptocurrency stocks.

What is cold storage in Cryptocurrencies?

When cryptocurrency is not in use, it is kept in cold storage. Every cryptocurrency wallet, whether it is for Bitcoin or another cryptocurrency, has a private and public key. Cold storage helps to protect your crypto assets against hacker and malware attacks. 

If a thief attempts to steal the hardware, you can prevent him from gaining access to your funds by creating a PIN code. You can even get your money back by entering a backup code or recovery phrase.

Here's an example: 

Bitcoin typically allows for instant withdrawals. To reduce the risk of an intruder stealing the entire reserve and breaching security, the operator keeps the bitcoin reserved in cold storage, which means that it is not present on the webserver or computer. As a result, the operator only keeps a limited amount or the desired amount on the webserver.

Advantages of Cold Storage: 

Disadvantages of cold storage:

Best Cryptocurrency Cold Storage Options

The following are some of the most popular cold storage options:

1. Hardware Wallets for Cryptocurrency (safest)

A hardware wallet is an electronic device that uses private keys that are stored offline to sign transactions. It also allows you to recover your funds if the device is damaged or lost by using a backup seed key. Hardware wallets are the most secure cold storage option for cryptocurrencies, but they are not cheap.

2. Paper Wallet

Paper wallets are an offline way of saving cryptocurrencies. It involves printing the public and private keys on a piece of paper. These printed keys are in the form of QR codes. Every time you need to make a transaction or exchange, you can do so by scanning the code. Since you are storing the keys with you away from the web server, there is the least possibility of it being stolen.

It is imperative to note here, that paper wallets are not well-suited for transmitting funds partially. For transferring or spending partial funds, the private key of your paper wallet shall have to be imported into a desktop wallet. Some paper wallet providers offer tamper-proof designs to increase security. Paper wallets are completely safe from malware, viruses, and hacks due to their offline nature.

After setting up the paper wallet, you need to ensure that the website code can be run in offline mode. Once the paper has been printed, you can place it in a sealed plastic folder, laminate it, or store it safely in a bank vault.

3. Cryptocurrency Storage on a USB Drive

One of the simplest ways to cold store your coins is to use a USB drive as a cold wallet. You can use this to export and save your private keys to a USB drive. However, this option has drawbacks, as anyone with access to your USB could gain access to your crypto coins.

4. Desktop Wallets 

Desktop wallets are clients that can only be accessed through your computer. In an offline environment, they can be used to export files containing encrypted private keys. The private keys are stored offline on your machine in these pieces of software. However, you are online while receiving or sending funds through them.

Digital (hot) wallet vs. cold storage wallet

A digital wallet, also known as a hot wallet, is another type of crypto storage that is connected to the internet. Here are some key differences between cold and hot wallets:

Security: Cold wallets are more secure than hot wallets. Although hot wallets can provide a high level of security, their online nature means they are vulnerable to hacking.

Convenience: Hot wallets are more useful. They enable you to quickly send and receive cryptocurrency, whereas cold wallets sacrifice speed for security.

Cost: The vast majority of hot wallets are completely free. The most common type of cold storage is hardware wallets, which typically range in price from $50 to $150. However, because crypto keys can be stored on paper, free cold wallets can be created.

Wrapping Up

Some people prefer to keep the majority of their cryptocurrency in cold storage while using a hot wallet for smaller amounts and day-to-day trading. Given how critical it is to keep your cryptocurrency safe, cold storage is a viable option worth considering. A hardware wallet is a relatively inexpensive one-time purchase, particularly if you intend to make a significant investment in cryptocurrency.

Those who have decided that crypto is a good investment often use a combination of hot and cold storage to get the best of both worlds.