What Is Cryptocurrency Cold Storage and Which Method Is Safest?

What Is Cryptocurrency Cold Storage?

Cold storage is removing your cryptocurrency keys from your wallet and storing them somewhere that is not connected to another device, a network, or the internet. Additionally, cold storage methods shouldn't have the ability to communicate with any other electronic device unless it is physically plugged into that device when you're accessing your keys.

Cold storage became a concern early on in cryptocurrency's development because of concerns over key theft by hackers. Originally, it consisted of writing down the keys on a piece of paper and removing them from the wallet. Cold storage has since evolved because it is more popular and users demanded easier and more secure methods.

Understanding Cryptocurrency Cold Storage

It's important to explore the concept of a cryptocurrency wallet to understand storage. For cryptocurrency users, wallets function somewhat similarly to physical wallets, which hold cash. However, these wallets hold cryptocurrency keys. They are digital storage tools that have both a public and private key.

The public key is similar to an email address because it is used as the address used to send and receive crypto. The private key is used to access the cryptocurrency. These keys are strings of characters necessary to complete cryptocurrency transfers to or from a wallet.

For safety, you can store the keys somewhere other than your wallet—if the storage medium has a connection to a device that is connected to the internet, it is referred to as hot; cold storage does not have connection or is not connected to a device that is online.

Cryptocurrency Cold Storage Methods

The most commonly used cold storage methods are hardware wallets. However, the number of cold storage techniques is limited only by the user's imagination. Some are more obscure, while others can be ultra-secure. Here are a few types that are or have been used.

Paper Wallets

Paper wallets involve printing or writing your private keys on paper and storing them somewhere. Another technique used in the past was adding a QR code that can be scanned to make transactions faster, but this reduces security because you have to use a device with a camera, both of which could be compromised.

A paper wallet with a QR code contains all the information needed to spend the coins, so its safety is crucially important. Paper wallets can be misplaced, the ink can fade, or you could accidentally leave one on your desk and spill coffee on it. If you choose this method, be sure to have a safe box or other secure storage method.

Hardware Wallets

Hardware wallets are storage devices that look like USB drives and can be plugged into or connected wirelessly to the device you use to access your wallet. They are one of the more safe and secure ways of placing your keys in cold storage. You can use anything from a standard USB storage drive to an advanced device with a battery, Bluetooth, software, and other features.

Air-gapped devices have no connection ability and are more secure than ones that can connect wirelessly. You can buy commercial hardware wallets from retailers and merchants; many are water and virus proof—some even support multi-signature (multi-sig) transactions. Multi-sig is a cryptocurrency signature method that requires more than one user to approve a transaction using private keys.

Sound Wallets

Sound wallets are an obscure and expensive way to store your keys, depending on your chosen medium. Sound wallets involve encrypting and recording your private keys in sound files on products such as Compact Discs (CDs) or vinyl disks (records). The code hidden in these audio files can be deciphered using a spectroscope application or high-resolution spectroscope.

Deep Cold Storage

Placing your cold storage hardware wallet in your safe is secure, but it isn't considered deep cold storage because it is easy to access. Deep cold storage is any method that is very inconvenient and requires time and effort to retrieve your keys. This could be anything from placing your hardware wallet in a waterproof container and burying it six feet down in your garden to using a third-party service that stores your cryptocurrency keys in a vault that requires multiple steps to access.

Burying your keys deep in the garden has several drawbacks, like lots of digging and remembering where you buried it, but so does the ultra-secure vault service. Vault services generally require your identity, proof of address, or other means of identification. Additionally, it can take hours or days to access your keys, depending on where they are physically stored.

Most cryptocurrency exchanges offer cold storage for their user's keys that is very secure. This deep cold storage is similar to enterprise-level data storage used by businesses and governments. However, there are risks to using third-party storage options like this, as exchanges are a favorite target for thieves. There is some measure of comfort to be had when using this method, as a few exchanges insure the assets you have in their storage. If you prefer to have a business hold your keys for you, make sure it insures your cryptoassets so you're protected if your keys are stolen while under its care.

The Bottom Line

Cold storage is transferring your private cryptocurrency keys to a non-connected medium. The medium could be paper, a usb drive, a commercially designed USB device, or any other method you can think of that stores your keys.

It's important to remember that it's the connection that makes a storage device hot or cold. When you're choosing a storage device, make sure you do your research and store your devices somewhere they cannot be damaged.