Crypto Cold Storage Explained: What is it? How it Works

crypto cold storage
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Since their inception, crypto wallets have proven to be a great way for users to safely store and trade cryptocurrencies. These wallets are divided into cold and hot wallets or storage. In this article, crypto cold storage is explained in detail.

Learn what crypto storage is, how it works, and more!

What is Crypto Cold Storage?

Cold storage, or wallet, is an offline cryptocurrency storage. Any crypto wallet that’s not connected to the internet is considered cold storage and is referred to as a cold wallet. This kind of wallet is protected from unauthorized access, hacks, and other vulnerabilities that a hot wallet or storage is subjected to.

To know more about Crypto wallets, you can check out this article on How Crypto Wallet works

The most common type of cold wallet is a hardware wallet, which is typically a small device that connects to a computer. Cold storage methods are useful and more compatible for individual investors looking to hold their cryptocurrency investment for a long time frame.

How Crypto Cold Storage Works

Cold storage solves this problem by signing transactions in an offline environment with private keys. When you access your keys, a cold storage method should not be able to communicate with any other electronic device unless it is physically plugged into that device.

Any transaction initiated online is temporarily transferred to an offline wallet kept on a device such as a USB drive, a compact disk (CD), a hard drive, paper, or an offline computer, where it is then digitally signed before it is transmitted to the online network.

Because the private key does not come into contact with a server connected online during the signing process, even if an online hacker comes across the transaction, they would not be able to access the private key used for it. In exchange for this added security, the process of transferring to and from a cold wallet device is somewhat more burdensome than the process for a hot wallet.

Crypto Cold Storage Options

You can store your cryptocurrencies in an online digital wallet, but an even safer way is through cold storage. There are several cold storage options you can leverage.

Hardware Wallets

Hardware wallets are the most common type of cold storage and unquestionably one of the most secure methods of storing your crypto assets. They are essentially advanced flash drives that allow you to store your private keys offline and are portable. To access your key, you must insert hardware wallets into devices.

In a hardware wallet, your private key is essentially embedded within the device, so instead of copying the key or even having to pull it up on the screen, both of which can leave you vulnerable to potential attacks, you simply click a button through the wallet.

Hardware wallets can also store and work with a variety of blockchains, and there are programs that allow you to trade directly from your wallet rather than first transferring assets into an online digital wallet.

Paper Wallets

Paper wallets are a low-tech cold storage option that is probably the least safe or secure. It entails printing your public and private keys on paper along with a QR code that can be scanned to expedite transactions.

Because a paper wallet with a QR code contains all of the information required to facilitate transactions, its security cannot be overstated. Because of its fragile nature, it is easily misplaced or destroyed. If this is your preferred storage method, make sure you have a safe box or another secure storage method.

Sound Wallet

A sound wallet is an interesting but more complicated cold storage solution. It allows an individual to record their private key onto a CD or vinyl disk in an encrypted manner so that when another listener attempts to play the CD, they will only hear static. A spectroscope application or a high-resolution spectroscope can be used to decrypt the code hidden in these audio files.

Deep Cold Storage

This is the most complex and inconvenient crypto storage option for storing your crypto assets. An extreme example would be to dig a hole and bury your cold storage. It becomes a lot harder for a perpetrator to steal your cold storage device if they need to dig six feet into the ground.

This also makes it difficult for you to access because you’ll have to dig and remember where you buried it. Another method might be splitting your private key into several parts, putting each part on a flash drive, and then putting each flash drive in a different safety deposit box or using a third-party service that stores your cryptocurrency keys in a vault that requires multiple steps to access depending on where they are physically stored.

How to Store Crypto in Cold Storage

As we know, there are different methods of crypto cold storage, but the most common type is a hardware wallet. It has proven to be one of the most secure ways to store your crypto assets.

Below is how to store and access your crypto storage using a hardware wallet. Each hardware wallet has certain types of cryptocurrency it can store. Some can store over a thousand, while others can store much smaller numbers.

  • First off, you can connect your hardware wallet to your computer. Then download the software provided with your Cold Storage wallet.
  • You’ll be given a seed phrase or backup code that should be kept offline (writing it down on a piece of paper) and safe, somewhere where it won’t get lost or accessible by others.
  • Each type of cryptocurrency (such as Bitcoin or Ethereum) needs its own wallet. Follow the instructions to create a new wallet for each type of crypto you are trying to store.
  • To access your device, you’ll have to set up a PIN.
  • Once you have a pin, you’ll be able to add your crypto to your cold storage wallet by clicking receive, which will show you your cold storage wallet’s address.
  • To take your cryptocurrency off of an exchange, log on to the exchange and send the digital assets to the address of your cold storage wallet.

Note that each hardware wallet has a recovery seed phrase. This phrase allows you to recover your crypto if you lose the device itself. It’s important to keep this safe because anyone who has it could have access to your crypto.

Conclusion

Crypto storage is widely considered the best option from a security perspective due to its offline capabilities, and many platforms use it to protect most of their own crypto. Leveraging this crypto storage puts you under the radar of hackers.

For large amounts of cryptocurrency, cold wallets can come in really handy. However, the biggest downside of cold wallets is the convenience factor. Since you need to hook up your cold wallet to move crypto, the process is slower than it would be if you were connected online.


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