A Simple Guide to Cryptocurrency Cold Storage
Cryptocurrency has become one of the most spoken-about assets in the fintech space. For many, the stories behind the likes of Bitcoin are a source of constant fascination, and the volatility of such digital assets a source of inspiration for traders, investors, and technologists alike.
Cryptocurrency is a form of digital asset (sometimes called a currency—although this is debated), which is upheld by encryption algorithms.
The “cold” storage of cryptocurrencies allows owners to essentially be their own bank, holding the asset without the aid of a third party, which in many ways shields them from theft or malicious activity. That being said, some companies provide cryptocurrency cold storage so that less tech-savvy traders can easily hold their coins and tokens in cold storage, although this is not a necessity and can be done without their dedicated hardware and software.
Traders must understand different types of wallets and the functioning of cryptocurrency cold storage to make informed decisions. If you are interested in knowing more about Cold Storage, the various Types of Wallets and how to actually store Crypto in Cold Storage, then read on. We’ll go through all you need to know in this post.
Types of Wallets
Before diving into cold storage, we first have to understand what the different types of wallets offer.
- Custodial Wallets
A custodial wallet is a cryptocurrency wallet wherein a third party holds the private keys for the traders. The third-party has control over the transactions in the wallet. The wallet owner must provide permission to the third party for every transaction to be carried out.
For some traders, especially those who are less tech-savvy or just don’t want to deal with the hassle managing their wallet and risk losing their keys—which in some cases could actually be riskier than the threat of hackers—using a custodial wallet is a reasonable option.
- Cold Wallets
Cold wallets can be defined as offline storage for cryptocurrencies. Cold wallets are not connected to the internet, making them safer from intrusion or theft.
The keys for the wallet are stored on a portable storage device, usually a USB.
- Physical Paper Wallets
Physical paper wallets are the simplest form of cryptocurrency wallets. The keys for accessing the cryptocurrency are printed on paper. The paper also has a QR code that can be scanned to make transactions.
Since this paper is technically “offline”, if this and the other copies exist only in the physical world, then paper wallets are also considered cold storage.
What Is Cold Storage?
Cold storage is the opposite of a hot wallet— a wallet that is maintained offline (sometimes called a paper wallet or a hardware wallet).
The wallet being offline vastly decreases the risk of any malicious attacks or unauthorized use. Individuals should at least keep some of their Cryptocurrency wealth in cold storage to reduce the threat of hacks, especially if the crypto is planned to be there for the long-term as an investment or as trading capital.
- A Brief Introduction To Blockchains
A blockchain is a sort of database that is used to store information digitally. A blockchain stores information about cryptocurrency transactions and maintains secure data records. The data is stored in blocks, which, when interlinked, become the blockchain.
Bitcoin is the first blockchain as well as first cryptocurrency to have been invented.
Is Crypto Cold Storage Safe?
Crypto Cold storage is considered one of the safest ways of storing cryptocurrency. Since the wallet is not connected to the internet, it is virtually impossible to hack or attempt any other sort of intrusion into the wallet. Crypto cold storage ensures the highest level of security by providing the trader with a key, password or passphrase that is the only way to access the wallet.
How To Not Lose Your Private Keys
To access the cryptocurrency wallet, traders require their private keys, preferably stored offline (if it’s a cold wallet).
The safety of these private keys is essential to prevent any theft or malicious activity. To safeguard their private keys, traders can use cold storage or multi-signature, which prevents their keys from getting stolen by hackers.
Can Cold Wallets Be Hacked?
Cold wallets are not connected to the internet, at least not until they are to be moved or exchanged. Once they are brought online, however, there is no guarantee as to the safety of those coins or tokens.
There are various ways in which traders can access their wallets with safety in mind. For example, they can access them through private keys stored in a portable USB hard drive that isn’t tethered to any devices that are connected to the internet. To double down on security, they can even access their keys from within a virtual environment, further reducing the risk of a hacker penetrating their device and accessing the wallet’s private keys.
Cold Vs. Hot Wallets
The primary difference between cold and hot wallets is internet connectivity. Hot wallets are connected to the internet and can be accessed online, while cold wallets are offline wallets and can only be accessed through a portable storage device.
Hot wallets are generally free, whereas hardware cold wallets can be expensive, although traders can make similar things for little to no cost with things like paper wallets mentioned earlier in the article.
Ease of Acces vs. Increased Security
Making transactions through a hot wallet is much easier than through a cold wallet. Even though hot wallets do not provide the same security as cold wallets, you are never more than a click of a button away from accessing and trading, exchanging, or transfering your funds.
The choice between hot and cold wallets is always a question of ease of access or increased safety.
How Do You Store Crypto in Cold Storage?
Traders must understand the steps involved in safely storing cryptocurrency in cold storage. The series of steps to be followed are:
- Generating A Private Key
The first step is to generate a private key which will be used to access the cryptocurrency wallet. This is done by creating an offline Cryptocurrency address. The trader must ensure that the keys are generated offline so that hackers or any third party cannot access them.
- Printing or Transferring to Hard Drive
The second step is to print (for paper wallets) or to transfer (for external hard drives) the private and public keys.
The public keys are essentially like the bank account number and can used to add or recieve cryptocurrency to the wallet, whereas the private keys are similar to a PIN number (albeit far longer), and are used to authorize and make transactions.
The printed paper wallet also consists of a QR code that can be scanned to quickly carry out transactions.
- Adding Funds To Your Cold Storage Wallet
Funds can be added to the cold storage wallet using the public key or the public address printed on paper. The QR code can also be scanned to add funds to the paper storage wallet.
- Redeeming Coins From Cold Storage
Traders must utilize the private key and connect it to an online cryptocurrency wallet to make transactions. This will transfer the cryptocurrency from cold storage to a hot wallet, which can be used to make transactions online.
Once the transaction is completed, it is good practice to transfer any remaining funds to a newly generated cold storage wallet.
Cryptocurrency cold storagee is the safesst way to store cryptocurrency, as the wallet is not “hot” via a connection to the internet. The wallet can still become vulnerable to intrusion if the physical storage device for the private keys is lost or stolen.
Traders must understand the differences between hot and cold wallets, which essentially just comes down to a choice between accessibility and security. If a trader can understand this, then they can choose the type of wallet to fit their needs.
There also may be slight nuanced differences in the way various cryptocurrencies are stored, depending on whether the kind of blockchain they use is PoW (Proof of Work) or PoS (Proof of Stake) or something else.
Bookmap doesn’t store cryptocurrency anywhere, but rather connects to your exchange via an API where you can then trade. This is almost always a “hot” wallet, as your exchange is by definition connected to the internet.
You can test Bookmap for crypto for free. Click here to get started today.