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What Is Cold Storage In Cryptocurrency?

Joshua Morris -

Cryptocurrency is decentralized. So, if you own some coins, it is your responsibility to keep them safe. To do so, you need a wallet. In the first line, you’d need to decide whether you want to keep crypto in a hot wallet or a cold wallet.

Hot wallets are programs or apps connected to the web. A hot wallet is online all the time. It is comfortable if you need constant access to it. Say, if you day trade, you would rather need a hot wallet because it is more convenient for this purpose.

But if your aim is just to keep coins, to invest in crypto, a cold wallet is the best option. A cold wallet is not connected to the internet. So, it is almost impossible for a hacker to get access to it and thus, to your crypto-funds.

If you compare the pros and cons of crypto wallets, it will look like this:

A USB, CD, hard drive, a piece of paper, a sheet of metal can serve as a cold wallet. Such wallets are not connected to the internet. In such wallets, transactions are signed offline. If a hacker comes across your transaction, they won’t be able to access your private keys. That’s why cold wallets are considered much more secure than hot ones.

Cryptocurrency Cold Storage Methods

Start with choosing a suitable cold wallet. It can be anything suitable for keeping your private keys:

  • A special device
  • A USB
  • A CD
  • A hard drive
  • A piece of paper
  • A sheet of metal.

When you note your private keys on something, you turn it into cold storage.

Paper Wallet

A paper wallet is the most basic storage option. A paper wallet is a piece of paper, a document with private and public keys printed on it. This document is usually printed with an offline printer from a special paper wallet tool online.

Normally, a paper wallet has a QR code. It can be scanned to sign a transaction.

While it is easy to generate a paper wallet, and it doesn’t cost you a single cent, this wallet is the least reliable of all the cold storage types. Paper gets destroyed or becomes illegible too easily. Once it happens, you lose access to your coins forever. That’s why now, a sheet of metal with engraved private and public keys is becoming more popular.

Hardware Crypto Wallets

A hardware cryptocurrency wallet is one of the most frequent options to store coins online. A hardware wallet can be a USB, a CD, a hard disk, or a special device.

Storage on a USB, a CD, or a hard disk can be compared to storing your coins in a paper wallet. You keep on the devices your private and public keys. If a device is lost, access to your crypto funds is also lost.

However, storing coins on specialized devices is something different. Such devices are developed by companies that specialize in them. The best hardware cold wallets do not just protect your coins. They come with a number of recovery options. So, if your hardware wallet is lost, you still can recover your coins.

The best hardware wallets are the following.

Trezor

Trezor is known for being the first to make a cold wallet for crypto (the first Trezor wallet was released in 2013).

A Trezor wallet is easy to use. Its user-friendly interface is highly intuitive and doesn’t cause any questions even by beginners.

A personal recovery seed makes the wallet always accessible. You can use it for wallet recovery even if the original wallet is lost or damaged. The recovery seed is compatible with many other wallets. So, your coins are safe.

Ledger Nano

Ledger Nano is another popular wallet, and for a reason. The wallet offers a top safety level and supports more than 1,500 coins and tokens. It is easy to set up and use.

The wallet exceeds all the safety requirements. So, it includes tamper-resistant Common Criteria (CC) EAL5+ certified secure element (SE) chips. Your private keys are stored there, on the chips.

The wallet is protected by a PIN code. A unique recovery seed allows you to recover your coins if your wallet is damaged, stolen, or lost.

KeepKey

KeepKey is another popular wallet. Its sleek and modern design is the first thing that attracts attention. The wallet is user-friendly. So, even inexperienced users can use it without major issues.

A PIN code adds an additional security level to your wallet. The digits are switched randomly so no hacker can track them when you are setting up your PIN code. A unique 24-word recovery phrase enables you to recover access to your coins if you lose access to the wallet.

The main disadvantage of KeepKey is the low number of supported coins compared to its main competitors. For now, KeepKey supports approx. 40 coins only. But if you do not aim to store less popular crypto, this wallet is a good option.

Offline Software Wallets

Finally, users can store their coins in offline software wallets. The storage principle is similar to hardware wallets. However, for inexperienced or not tech-savvy users, offline software wallets might be too complicated to use.

An offline software wallet divides a wallet into two platforms:

  • An offline wallet. There, private keys are kept. It signs transactions with private keys. The offline wallet never goes online.
  • An online wallet. There, public keys are kept. It works for handling transactions online.

The latter generates an unsigned transaction. After that, the user address is sent to the other end of the transaction (a recipient). The unsigned transaction is moved to the offline wallet. There, it is signed with the private key stored there. After that, the signed transaction is moved to the online wallet and from there, it is broadcast to the network.

The most popular offline software wallets are Electrum and Armory.

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