Due to the decentralized nature of crypto, much of the responsibility for storing them safely falls on the owner. Should your crypto ever get lost or stolen, there is no feasible way of recovery.
As a result, you will find that several security-conscious crypto enthusiasts turn to cold storage to keep their coins safe.
Let’s not get ahead of ourselves, what exactly is crypto cold storage, and why is it the go-to for individual investors, major cryptocurrency exchanges , and some of the companies behind the best cryptocurrency stocks.
To find out why, let’s take a look at how cold storage works and what makes it so safe.
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What is Cold Storage?
Cold storage is the storage of cryptocurrency offline. A crypto wallet that’s not connected to the internet is considered cold storage and is referred to as a cold wallet.
The most common type of cold wallet is a hardware wallet, which is typically a small device that connects to a computer.
Because it’s offline, cold storage offers excellent security for Bitcoin and other cryptocurrencies. Hackers won’t be able to gain access to your crypto without it being connected to the internet.
How Does Cold Storage Work?
The goal of cryptocurrency storage is to protect your private keys that grant access to your crypto. The best way to do this is through cold storage, because with cold storage, your keys are kept offline except during the transaction process.
There are two types of keys for cryptocurrency: a public key and a private key. The public key identifies the specific crypto wallet during transactions. The private key is the code that allows the owner to access the crypto in the wallet.
If you own a hardware wallet, connect it to your computer, then choose the option to receive crypto, which will generate an address. Send your crypto to the address generated to store it on your cold wallet. The device has both your public and private keys, so once you disconnect it from your computer, that information is completely offline.
If you want to transfer crypto from your cold wallet to another address, it’s a similar process. Connect the cold wallet to your computer, enter the address, and send your crypto.
Cold Storage Wallet vs. Hot Wallet
The other type of crypto storage is a digital wallet, also known as a hot wallet, which is connected to the internet. Here’s how cold wallets and hot wallets compare in a few key areas:
- Security: Cold wallets are more secure. Although hot wallets can provide a high level of security, being online means they carry the risk of being hacked.
- Convenience: Hot wallets are more convenient. They allow you to quickly send and receive crypto, whereas cold wallets sacrifice speed for security.
- Cost: Most hot wallets are free, the only sacrifice needed is your data – personal information, email, etc. – for you to make use of them. Meanwhile, Hardware wallets are the most common form of cold storage, and they usually cost $50 to $150.
You can find hardware wallets similar to a USB device in terms of design. In some cases, paper-based hardware wallets are also suitable for storing crypto. A paper-based crypto wallet is nothing but the documentation of your public and private keys on a piece of paper.
Generally, investors perceive hardware wallets as the proven instrument for safeguarding their digital assets. Since hardware wallets are offline, they present limited vulnerabilities for hacking. However, you also have the risk of loss or theft of your hardware wallet.
To get the best of both worlds, those who invest in crypto often use a combination of hot and cold storage. They keep the bulk of their crypto in cold storage but use a hot wallet for smaller amounts and day-to-day trading.
Given how important it is to keep your crypto safe, cold storage is a smart option that’s worth considering. A hardware wallet is a fairly inexpensive one-time purchase, especially if you’re planning to go all into cryptocurrency.