When you have cryptocurrency tokens, you must choose the best way to store that currency. You want to find a solution that provides you access while keeping that digital money secure. One option is cold storage. If you want to know more about a few of these storage methods, here are a couple of things to keep in mind.
Looking to learn more about the basics of Crypto? Check out our Crypto terms every investor should know.
What Is Cold Storage?
Cold storage is an offline wallet. It is used for storing Bitcoin and other types of cryptocurrencies. With cold storage, you will have a digital wallet without any connection to the internet. As a result, the wallet remains protected from cyber hacks and unauthorized access. Plus, it is not left vulnerable to any connectivity problems. These storage options are great for individual investors, but many cryptocurrency companies also use cold storage wallets.
Related: Accepting Bitcoin at Your Business: How to Start Easily
Understanding Cold Storage
When you have a checking, credit card, or savings account with a traditional bank, lost or stolen money gets refunded after a compromise to the account. However, with some cryptocurrency wallets, once they have been compromised, the owner has lost those coins. Unfortunately, most digital currencies are decentralized, meaning they do not have the backing of the central government or bank. With that in mind, crypto holders must take more stringent security measures to protect those tokens.
All cryptocurrency storage options will provide access with public or private keys. The public key is similar to the account name and email address that helps identify the destination to send the coins. On the other hand, the wallet’s private key is a unique string of alphanumeric characters to access the digital wallet. When two individuals make cryptocurrency transactions, they must share their public keys to complete the transaction.
Once the crypto payment has been delivered to the digital wallet, the receiver will access the funds with the private key. The wallet could be unlocked and accessed without authorization with a stolen key. For that reason, it is essential to keep those keys secure.
Is There a Difference Between Cold and Hot Storage?
When you need to store your cryptocurrencies, there are several options. Along with cold storage, another method is called hot storage. These hot wallets connect to the internet and include the wallet and apps. Cryptocurrency exchanges often host these hot wallets. Here are some considerations regarding cold vs. hot storage for your cryptocurrency.
- Costs: Hot wallets are the better choice if you want the cheaper option. Most of these wallets are free. Some cold wallets are free, but the majority do charge a fee.
- User experience: Hot wallets are more convenient because you can easily access them online. Those cold wallets will need another step to connect and transfer tokens.
- Security: Cold wallets are more secure, which is a considerable advantage over those hot storage options.
If you cannot decide between those two wallet options, many crypto investors will use both for their coins. Some hold a small portion in a hot wallet for current transactions, while the remainder of the holdings stays in the secure cold wallet.
Related: How to Sell Your Cryptocurrencies
How Does Cold Storage Work?
Cold storage requires you to sign in with a private key in an offline environment. You will not be able to communicate with another electronic device unless it is plugged into the device that is accessing the keys. You will transfer any transaction initiated online to an offline wallet on the hard drive, offline computer, or USB drive. The private keys will not come into contact with an online server during the signing process. If a hacker comes across the transaction, they will not be able to access it with a private key. While this method is more secure, making a transaction can be a burdensome process.
There are several methods used with cold storage.
Paper Wallet
The most basic cold storage form is the paper wallet. A paper wallet is a document with private and public keys written on it. The paper wallet will have an embedded quick response (QR) code. For that reason, it can be easily scanned and signed to complete the transaction.
Hardware Wallets
Cold storage can use an offline driver or smart card to generate private keys in an offline environment. The USB wallet will use a smart card to secure the private keys. This device will function and looks like a USB storage drive with a battery. Like the paper wallet, you must store this device safely. There will be no way to recover any lost or stolen coins.
Sound Wallets
These wallets are an expensive way to store those keys. The sound wallet will encrypt and record your private keys in sound files on a vinyl or compact disc.
Deep Cold Storage
While placing your keys in cold storage is secure, it does not always provide easier access for you. It takes some effort to retrieve those keys. Some people bury their keys in a water-proof container in the ground or hire a third-party service to store them. No matter your storage option, it will take plenty of time to access your keys.
Related: How To Avoid Crypto Theft?
Offline Software Wallets
Finally, offline software wallets are similar to hardware wallets, but there is a more complex process to access them. An offline wallet splits into two platforms: one for the public and one for the private keys. This wallet will connect to the internet, ensuring it remains secure.
No matter your wallet type, you will want one compatible with your specific currency. Remember that not all wallets will support all digital currencies.
Do you want a better way to store your cryptocurrency? At Unbanked, we have several solutions to secure your tokens. Reach out to us today!
