In the world of cryptocurrency, you need to be sure that your coins are safe at all times, hence there comes the need for a cold storage to give you maximum security and safety for your digital assets.
In simple terms, cold storage means storing your Bitcoin offline where it cannot be hacked. It is the opposite of a “hot” wallet which is connected to the internet.
It becomes a must in case you are dealing with large amounts of Bitcoin or other digital currencies. Investors who which to preserve their digital assets for a very long-term often make use of cold storage.
However, this cold storage is different from other types because the crypto ecosystem is quite new and a little tricky to understand.
Why We Make Use of Cold Storage Wallets
It's worth keeping in mind that crypto assets come with considerable security risks these days which could easily diminish your investments.
For instance Exchanges and third-party wallets hold your private keys on your behalf. This is a very big risk because if something goes wrong with their servers, or if they decide to shut down, then your coins are gone forever.
To minimize the possibility that an intruder could steal the entire reserve in a security breach, Investors needs to follow the best practice by keeping majority of their digital assets in cold storage.
Therefore the only amount advised keeping in Exchanges is the amount needed to cover anticipated withdrawals.
To avoid a situation such as hacking, don’t store your digital assets for more than 1-2 days with any hosted or third-party service. It is essential that you keep your assets safe in an offline manner.
Types of Cold Storage Wallet
1. Paper Wallet: The most basic form of cold storage is a paper wallet. A paper wallet is simply a document that has the public and private keys written on it. The document is printed from the bitcoin paper wallet tool online with an offline printer. These printed keys are in the form of QR codes. A paper wallet is a safe way to guard your investment against hackers and computer malfunctions.
Each time you need to make a transaction or exchange, you must scan the code. Since the keys are stored separately from the web server, there are zero chances of them being stolen. One thing you must ensure is the safety of the paper wallet, so it does not land in wrong hands.
2. Hardware Wallet: A hardware wallet is an electronic device. It enables you to store your digital assets offline. They exist in multiple forms, but the most common version is the USB stick. They come in the form of a USB device with a small screen which allows you to create and set up a digital wallet that can be taken offline when not in use.
Common hardware wallets include:
- Vault0x (This is a wearable Hardware Wallet)
Like a paper wallet, it is essential to store this USB device and smartcard in a safe place, as any damage or loss could terminate access to the user’s bitcoins.
3. USB stick or external hard drive: Using a USB drive as a cold wallet is one of the easiest ways to cold store your coins. With this, you can export and save your private keys on the USB drive.
4. Desktop Wallets: Desktop wallets are software programs installed on a computer/laptop and accessed directly from that device. The keys are stored on the hard drive and offer much better security. But while receiving or sending funds through them, you are online.
Various industry experts and leading publications are concerned about crypto security. A good number of them recommend cold storage.
Note: If you lose your cold storage device, your bitcoin is gone forever.
If your hardware wallet is stolen, or your paper wallet is damaged by water, or hard drive gets corrupted. In all these cases, you cannot get your money back.
When you’re using cold storage, always keep a backup, just in case.