For most people, the preferred way to store their bitcoins and other cryptocurrencies is the exchange wallet, i.e. the wallet of the same exchange from where they originally purchased the coin.
This is okay as long as you are not investing a huge amount in cryptocurrencies. Otherwise, cold crypto storage is a better and more secure way of storing your cryptocurrencies.
Unless you are investing heavily in cryptocurrencies or have a huge amount of bitcoins or other valuable coins, you can keep storing them in the default exchange wallet or any other digital crypto wallet. The reason I am saying this is that the exchange-based or standard crypto wallets are not very secure.
They employ only the bare minimum security mechanisms, including password protection, 2FA, etc. These wallets can be hacked. In fact, there are many cases where exchange wallets were hacked and cryptos were installed.
Cold storage comes as a much more secure alternative to digital crypto wallets.
What is cold storage for cryptos?
Cold storage for cryptocurrencies is an offline or physical wallet that is primarily used for the safe storage of cryptocurrencies. As the name suggests, cold storage will store your coins on a platform that is offline, i.e. not connected to the internet. This ensures that your wallet and coins are safe from the reach of cyber hackers and other internet vulnerabilities.
Online crypto wallets are easier to hack compared to offline wallets. Physical wallets are not only difficult to find but also prevent unauthorized access.
Then, why isn’t everyone using cold storage to store their coins?
That’s because cold storage can be quite expensive to use. Therefore, using a cold wallet to store your crypto is worth it only if you have a huge amount of bitcoin or any other valuable cryptocurrency to store. If not, using a hot or digital wallet is feasible for storing a small amount of crypto.
Why is cold storage important?
The biggest benefit of cold storage for cryptocurrencies is that it’s more secure than the online options. Traditionally, cryptocurrencies such as bitcoins are stored in an online wallet or the default exchange wallet.
These wallets are centralized and therefore easy to hack. The private keys associated with transactions from/to an online wallet can be accessed by hackers and used to steal your coins.
Cold storage will securely store your cryptocurrencies or their information (address, private keys, etc.) in a physical device that is kept distant from the reach of online crypto thieves, making it the most secure way of storing digital currencies. A cold wallet has no internet connection whatsoever.
How cold storage or wallet works
Cold storage is a physical wallet that is usually kept on a USB or an offline computer device. It stores the digital currency wallet address and keys (public key and private key).
In order to process a new transaction, the same must be signed using private keys that are stored in the offline wallet. So, the transaction is temporarily sent to the offline wallet where it is then signed using the private key stored offline.
During the signing process, the private keys remain offline all the time and therefore cannot be hacked or accessed by an online hacker. The signed transaction is then sent back to the online network.
A normal online wallet or hot wallet keeps the private keys in a secure online server. Since all the details required to access the crypto is stored in a single online wallet, it’s easy to hack, especially during a transaction when the private keys are used to digitally sign the transactions in the online environment.
So, to conclude, cold storage is a secure way to store your cryptocurrencies, particularly when you have a lot of it, making you worried about online threats such as hacking and theft. In exchange for the security that the cold storage provides, it comes with a high setup and maintenance cost, along with a burdensome process of transferring the transaction to/from the cold wallet every time it needs to be verified.
Setting up a cold storage wallet for cryptocurrencies
When looking for a cold wallet to store your cryptocurrencies, you have many options. The common types of cold storage in use are –
- Paper wallet
- Hardware wallet
- Desktop wallet
- USB wallet
A paper wallet is the most basic example of cold storage for cryptocurrencies. It’s also very easy to set up and use. To start using a paper wallet to store your crypto, you’ll first need to find a Crypto Paper Wallet Generator online.
This is an online tool that will generate random keys for your digital wallet and print them on paper. Use the tool to generate the private key and public key combination for your wallet. Now, use the print button to print the wallet details, including the QR code, private key and public key. You can also download the paper wallet on your computer and print it later.
You can store your paper wallet anywhere you like, in a safe, in your files or any other safe place. Whenever you need to make a transaction in your crypto wallet, you can just scan the QR code embedded in the paper wallet.
The only drawback to using paper wallets for storing cryptocurrencies is that the wallet address will become inaccessible if the paper it is stored on is lost or destroyed somehow.
Another common type of cold storage for cryptocurrencies is a hardware wallet, which is a USB-like device used to securely store the private keys for a digital wallet. The hardware wallet or USB must also be stored in a safe place so as to not accidentally damage or lose it.
So, this is all you need to know in order to get started with cold storage for cryptocurrencies. Make sure to analyse your particular requirements and choose a wallet that is compatible with the coins you want to store or trade.