What is Cold Storage?

The term ‘cold storage’ refers to preserving the private keys to cryptocurrencies in offline digital wallets, whereas “hot wallets” refer to private keys stored in online wallets. Cold storage is generally a more secure option, especially when dealing with a large amount of currency.

What are private keys?

Private keys (also known as a “seed phrase” consist of a unique string of 12 words that is issued to you when you open a cryptocurrency wallet. The phrase “not your keys, not your coin” refers to the fact that if you do not hold the private keys yourself, then you must depend on a centralized 3rd party to hold them and are vulnerable any time that 3rd party is compromised. Holding and safeguarding the private keys yourself (preferably) in cold storage increases the security level of your digital assets (unless you lose your keys!).

Cold wallets – also called ‘hardware’ wallets‘ – are one of the best tools for safeguarding cryptocurrencies. This is because of the offline asset storage and also because ownership is physically in the owners’ hands – making it very challenging for hackers to access. Cold stored cryptocurrency is not as susceptible to hacking, phishing, and other damage that leads to a loss of digital assets. Moreover, they are the ideal wallet for long-term storage.

How do you use your crypto if it’s in cold storage?

If you want to trade cryptocurrencies or use them in some other way, you can go online and either plug in your hardware wallet or open a wallet, enter your handwritten seed phrase, and send crypto a platform wallet where you have more options. (Alternatively, you can use a Web3 wallet such as MetaMask or Trust Wallet which allow you to access your digital assets through a browser application without having to give up your private keys.)

Types of Cold Storage

There are various methods of cold storage, which include keeping Bitcoins…

  • …on a USB drive or any other type of data storage medium in a safe place.
  • …on a paper wallet (a storage method that works by having a single private key and Bitcoin address on paper – the paper must be securely stored offline).
  • …by using an offline Bitcoin hardware/cold wallet such as Trezor.

Is Cold Storage Fool-Proof?

As is the case with most crypto creations and systems, there are some potential issues with cold storage methods. While they do exist, it is possible to mitigate them. Private keys and/or backup seeds may be vulnerable to loss or theft. Here are just some of the more common cold storage mediums and their notable weaknesses.

1 – Paper wallet

Paper wallets are created when you write down your private keys (seed phrase) on a piece of paper and then secure the paper, for instance, in safe, safe deposit box, or other physical location. Vulnerabilities may still occur:

  1. Anyone who can see it can access your digital assets.
  2. Handwriting may be difficult to read, or person may not have access to a printer
  3. Caution is necessary as to a printer’s WiFi connection and memory.
  4. Paper itself can rot, tear, burn, or can be susceptible to smoke damage.
  5. Laminating the paper can help preserve the seed phrase but may still be vulnerable to time/damage.

4 – Digital storage on a off-line device

  • Computers can crash and frequently make data recovery expensive.
  • Magnetic fields can corrupt data on a traditional hard disc drive and can physically shatter it.
  • There are various accidents that can result in a loss of data.
  • Computers continuously face ongoing threats. These range from 0-day exploits to firmware exploits, as well as malicious types of USB cords.
  • External HDDs (Hard Disk Drives) are only good for storage of a few years, so long as there’s proper storage.

Hot Storage: what’s the difference?

Hot wallets refer to any type of cryptocurrency wallet that connects to the Internet. In general, these wallets are very easy to set up and access and they also accept more types of tokens. With that said, they can be vulnerable to hackers, possible regulation, and certain other technical susceptibilities. While cold storage is more secure, hot wallets accept more cryptocurrencies and provides a higher level of usability than cold storage options.

Overall, the primary distinction between a hot wallet and a cold wallet is one crucial thing: Internet exposure. Investopedia editor, Jake Frankenfield, explains that:

There are different reasons why an investor might want his or her cryptocurrency holdings to be either connected to or disconnected from the internet, and so it’s not at all uncommon for cryptocurrency enthusiasts to hold multiple wallets, some of them hot and some of them cold.”

People who want to trade or make frequent purchases with their cryptocurrency assets will often choose a hot wallet over cold storage. But often, they only store the amount needed for the short term, with the bulk of the digital assets safely cold stored away. This is usually due to holdings in the cold wallet are not transferable across the Internet. Be that as it may, hot wallets tend to face security issues much more frequently than cold storage methods.

Now that’s not to say that hot wallets are inherently unsafe ways to store your cryptocurrencies. The focal point of this section is strictly to compare the two different methods, not make hot wallets appear inferior. Hot wallets are able to access parts of the Internet and enable crypto trades and purchases because they connect to the Internet. Whereas cold storage is completely detached from the Internet ecosystem and is, in its true essence, a place of storage as opposed to one of usage.

Chris Castiglione, One Month writer, provides this perfect analogy: “…a hot wallet can be thought of like a pocket wallet that you walk around town with, cold storage is a bank vault.”

Wallets to check out

There are a good number of cold wallets that are available today. The top wallets have been narrowed down to the following five.

Wallet #1: Ledger Nano S

A device the size of a USB that has a metal casing for extra durability. The general design is very simple and compact, and its interface is incredibly easy to use. This device operates through Ledger Live, which is a desktop app that allows interaction with the device.

This device is notable not only for its portable design but also for the number of coins and tokens it supports. It supports over 1,000 coins and tokens. This includes Bitcoin, Litecoin, Zcash, Ethereum, Ethereum Classic, Dogecoin, and Dash. In addition, it supports a wide variety of ERC-20 tokens. Moreover, the device can interact with online wallets like MyEtherWallet, Electrum, and Mycelium.

It’s potentially more secure from potential hackers thanks to the physical buttons that are necessary for executing transactions. It possesses a tamper-proof feature that frequently checks the integrity of the hardware wallet every time it turns on.

Wallet #2: Trezor Model T

This is a second-generation device that stores multiple cryptocurrencies offline. Trezor One had a simple format with two buttons and a screen. Model T is an upgrade of the Trezor One, specifically removing the two buttons and making it a full-color touchscreen. It is comparatively more secure with PIN entry, passphrase entry, and device recovery occurring on the device. That is to say, security and recovery functions do not happen on a computer or mobile device.

The newest Trezor comes with a magnetic dock for safekeeping and has a seal that lets you know of any intrusion. Furthermore, it supports over 700 coins, with some absentees being EOS and Tron. These cryptocurrencies include Bitcoin, Ethereum, Ripple, Litecoin, Bitcoin Cash, Monero, and Dash.

Wallet #3: Keepkey

A device that’s slightly larger than Ledger and Trezor that functions as a Hierarchical Deterministic (HD) wallet. This makes it ideal for generating and storing a limitless number of keys. It consists of a large screen and requires very little technical knowledge to use.

This wallet supports roughly 54 coins, including Ethereum, Bitcoin, Dash, Litecoin, Dogecoin, Bitcoin Gold, and numerous ERC-20 tokens. Moreover, it has a desktop client app, which interfaces with the wallet.

Wallet #4: Coldcard

A Bitcoin hardware wallet that signs transactions and can also function offline. It has an array of special features, including its ability to operate offline throughout its lifecycle. It has a crypto-security chip and it accepts MicroSD for very easy backup. The software is open-source, which means that you can modify it any way you want, assuming you understand blockchain programming.

An additional feature is a secondary wallet. This creates an additional private key, which will allow another wallet onto the same device. This is very useful in case of robbery or any other dangerous situations. The cryptocurrencies residing on the main account will remain secure, while the secondary wallet’s contents are for the situation at hand.

Wallet #5: Bitfi DMA-2

This wallet is the outcome of research on what the best way to secure cryptocurrencies is. It supports many cryptocurrencies, including Bitcoin, Litecoin, Monero, NEO, Ethereum, and ERC-20 tokens. As is, there are other cryptocurrencies that the wallet is taking into consideration. The wallet itself requires no updates or downloads of any kind to remain up to date.

There is a major advantage that this wallet has over other cold storage wallets. While many keep their private keys on computers, the Bitfi doesn’t store them anywhere. So, if someone steals or seizes the wallet, they are unable to extract the assets in it. In lieu of storing the private keys, the wallet calculates the key via algorithm whenever the user types in the passphrase.

Remember to always DYOR (do your own research) and use the HedgeTrade blog as a research tool for learning everything you need to know about cryptocurrencies.

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