What Is Cold Storage?

When you start investing in cryptocurrency, you’ll have the option of storing your tokens in what’s called “cold storage.”

What is cold storage? Let’s find out.

Cold Storage Definition

Cold storage allows you to keep your cryptocurrency offline, typically on a removable flash drive or an external hard drive. The goal of cold storage is to prevent hackers from being able to access your account and steal your cryptocurrency coins.

When you store your cryptocurrency using this technique, you’ll be ensuring that the device is not connected to the Internet.

If someone tried to hack into and steal your cryptocurrency, they would need the physical device to do this. It’s a much safer way to store cryptocurrency without worrying about malware, viruses or hackers targeting your account directly.

What Is a Cold Wallet?

You need to store your cryptocurrency somewhere, and it’s not a simple file that sits in your drive. These highly encrypted files are hard to access unless you have the private and public keys.

This is very similar to the online wallets that people are accustomed to. What’s special about these wallets is that they are more secure than a traditional wallet and will store all of your cryptocurrency offline.

Since your private key that controls your wallet is never online, your cryptocurrency is highly secure. You’ll be able to choose from a variety of different cold wallets to find one that fits your security needs best.

How Does a Cold Wallet Work?

A cold storage wallet for cryptocurrency works a lot like the hot wallets that you use. While a hot wallet is connected to the Internet, a cold wallet does not. You will be able to choose from a variety of different wallets to find one that best meets your security and storage needs.

You’ll find that there are a variety of different cold wallet types, but the most common requires you to have a USB flash drive or USB hard drive, that attaches to your computer to access your cryptocurrency. You simply attach this device when you need to access your cryptocurrency and remove the device so that it cannot be infiltrated.

But there are multiple different types of storage available:

  • USB flash drives or external hard drives that you are in full control of at all times.
  • Paper wallets where a person has written down their private key and actually keeps this information secret somewhere else.

Which option is better? That’s up for debate. The one main issue with storing your cryptocurrency on a portable device is that devices are susceptible to malfunctions. If your hard drive crashes, you lose all of your Bitcoin, Ethereum, or whatever coin you’re currently storing on the device.

In theory, a paper wallet will be the most secure option that you have. But there is also a chance that you lose your paper wallet and all of your cryptocurrency at the same time.

You have to remember that the block chain actually exists online, so if you’re going to make a transaction, this transaction will need to be recorded in the online ledger. During this time, your cold storage device will have to be connected to the Internet to make the transaction complete.

A lot of individuals will have two different devices that allow them to store and complete these types of transactions. These are called air gaps.

What is an air gap?

This is when you connect your one cold storage device to a device that is always online.

Pros and Cons of Cold Storage Options

If you opt to have cold storage for your cryptocurrency, you’ll have to know that there are advantages and disadvantages to hot and cold storage.

Pros

  • You’ll be less susceptible to hacking attempts
  • You have full control over your cryptocurrency
  • You don’t have to rely on an online wallet to keep your data and cryptocurrency safe

Cons

  • You have to eventually attach your device to the Internet
  • Devices can be susceptible to malfunctions, which can cause you to lose all of your cryptocurrency
  • You’re not able to benefit from cloud computing that allows you to copy your private key to multiple servers for better redundancy

Of course, you can make backups of your cold wallet so that you don’t have to worry about losing your investment. This is a smart option for a lot of people who have a significant investment in cryptocurrency because a cold wallet is the absolute most secure option available.

Hacking will always be a concern with cryptocurrency. If you have a lot of cryptocurrency, it may be smart to have a cold storage option with some sort of redundancy in place to keep your cryptocurrency safe.

This is the only option you have to keep your currency offline.