Cold Storage is the term given to digital wallets held offline to protect cryptocurrency funds from fraudulent use by others – they are especially necessary for preventing online theft of large reserves of cryptocurrency.
A cryptocurrency exchange offers instant withdrawal facilities and keeping large deposits in a “hot” digital wallet online at the exchange is not secure – just as keeping a large balance on a current account is not advisable because of the risk of fraudulent activity if a debit card is lost or stolen.
Hackers have preyed upon Bitcoin and cryptocurrency exchanges – and rather than lose your funds, Cold Storage for any deposits other than those needed for immediate payments is advisable.
There are different Cold Storage solutions and facilities available – and different ways of keeping important data relating to a cryptocurrency balance offline and safe. It is up to the individual to choose which method of Cold Storage suits them best.
How does Cryptocurrency Cold Storage work?
Cold storage is a “cold” wallet that is offline – ie is not connected to the Internet – and the user can transfer funds from a Cold Storage wallet to their online “hot” wallet at the exchange for the purposes of making payments and investments whenever they need to.
The exchange will also hold the details of the public and private keys needed to access the wallet and send payments or transfer funds.
The keys are cryptography, which give the user access to their account –these need to be kept securely offline with any large amounts of crypto funds, to prevent hackers from accessing an account, or the user simply losing the keys needed to access their account, or the keys falling into unauthorised hands.
There are now companies offering Cold Storage solutions to cryptocurrency users – such as Ledger. Different wallets are offered according to the cryptocurrency and it is also possible to buy hardware devices to set up Cold Storage.
What types of Cold Storage are there?
Rather than use Cold Storage solutions offered by a private company, some holders of cryptocurrency devise their own methods of keeping their funds offline, including:
- Uploading to a USB stick or memory card and keeping these in a home safe or locked safety deposit box.
- Using a paper wallet and keeping details inside this in a safe place at home. The public and private keys issued with an account at the exchange are written on paper and stored as a hard copy in the wallet. It is important not to use Wifi to download the details of keys as the information could be seen by others – it is safer to save the keys to an external device such as a USB stick to print them. Open source software websites such as Bitaddress.org or WalletGenerator.net can show you how to make a paper wallet and transfer your crypto funds at the exchange to Cold Storage, but be aware of the risks of your information being seen by others if you use Wifi or open source sites. Ripple has its own paper wallet generator for users of one of the most popular cryptos, XRP.
- Desktop wallets are folders on your computer containing the data needed to access your account at the cryptocurrency exchange – the risk with these is that if your computer hard drive crashes or is hacked, you could lose all your cryptocurrency.
- A physical Bitcoin containing the value of your cryptos – these are also called Casascius coins and the value of them can be transferred to an online wallet using a private key. The coin has a tamper-proof hologram and has embedded in it a piece of paper with the value of the Bitcoin on it. You can buy a portion of a Bitcoin on exchanges using normal payment methods, including cash – because the value of Bitcoin has soared so much, it is now more usual to buy part of a Bitcoin rather than a whole one.
The potential issues with storing cryptocurrency or public/private keys using hard copies is that they can be damaged, lost, or others might view the information needed to access the hot wallet held at the cryptocurrency exchange and be able to gain access to the funds illegally.
It is thought that cryptocurrency “hardware” wallets are therefore the safest way of storing cryptocurrency, rather than using USB sticks or memory cards, or keeping paper records or physical Bitcoins.
Cryptocurrency Hardware Wallets
A cryptocurrency hardware wallet for Cold Storage is thought to be the most secure form of stashing cryptocurrency offline because it enables the holder to transfer funds easily to the hot wallet at the exchange when needed, using secure private keys also stored offline.
The added bonus is that funds can be recovered with a backup seed key – seed loading involves using an external hard drive or similar device to prevent large amounts of sensitive data being continually transmitted over the Internet.
The backup seed key enables the user to access the data if the hard drive is lost or damaged and becomes inaccessible.
Different hardware wallets – also called ledger wallets – are now available to buy. Companies like Ledger, KeepKey, Trezor all provide hardware devices which support multiple altcoins and which can be controlled by compatible mobile apps.
What is deep Cold Storage?
Deep Cold Storage is as simple as uploading cryptocurrency data held inside a digital wallet to a memory stick or memory card and locking it inside a safety deposit box.
The data on the hardware device – the memory stick or card – would contain the private keys needed to spend any cryptocurrency, thereby protecting funds from unauthorised use.
It may be that in cases of large amounts of cryptocurrency in Cold Storage, a nominated person might have access to a deep Cold Storage device – for example, a solicitor or someone who holds Lasting Power of Attorney for an individual or family member, in case they become unable to act for themselves.
Are there disadvantages to cryptocurrency Cold Storage?
The disadvantages regarding Cold Storage of cryptocurrencies mainly relate to system failures of hardware devices such as computer equipment, USB sticks and hardware wallets, or paper wallets becoming damaged.
Physical devices containing the public/private keys and cryptocurrency balances at the exchange – including physical Bitcoins – can also be lost, or unauthorised persons might see the private keys needed to access accounts.
However, if holders of large amounts of cryptocurrency do not use some form of Cold Storage, the risk of keeping all the funds in a hot wallet at the exchange is as great a security risk, if not greater, because of the risk of hackers accessing the funds.
Providers of Cold Storage solutions are now offering so many options to cryptocurrency users to back up their data and keep their cryptos safe, that the industry is constantly developing safe solutions for Cold Storage.
As with most online activities and services, backup is crucial to maintain the security of cryptocurrency funds – and some of that backup can be digital in an offline Cold Storage Wallet, as well as using a Cryptocurrency Hardware Wallet, or simply keeping additional backup of crucial data on USB drives and on paper. A mix of Cold Storage solutions is always an option to make sure you alone have access to your cryptos and hackers cannot access your funds.
Disclaimer: This article is for information only and does not constitute investment advice or recommendations – always seek the advice of a reputable financial adviser before investing, as the value of investments can go down as well as up.