Many crypto holders prioritize security over conveniency, which is right, but how to achieve the maximum safety for your funds? Cold storage wallet for cryptocurrency is a solution.
Cold Storage Definition
Cold storage is the way of storing crypto. Cold storage is done by keeping your keys in a cold wallet, which has no connection to the internet. There are several types of cold wallets, including hardware wallets which are the most popular of them. Needing no internet connection to operate, these devices are the best for secure cryptocurrency storage as it is almost impossible to hack.
Now that we know what is a cold wallet and what is cold storage, let’s talk about how it works.
How Does Cold Wallet Work?
The private keys are signed in an offline environment when you keep your crypto assets in a cold wallet. By having no internet connection cold storage has no ability to communicate with other electronic devices unless two of them are physically connected.
All the transactions completed online are stored temporarily on a small device such as a USB drive, hard drive, paper or even compact disk.
Even though your funds are well-protected with the help of cold storage, transactions usually look like something more burdensome in comparison to hot wallet transactions.
The process of receiving new tokens to a cold wallet itself usually goes like this:
- The investor connects the hardware wallet to an internet-enabled computer.
- The investor selects the option to receive tokens. The device generates an address to facilitate the transaction.
- The sender initiates a transfer of tokens to the address generated above.
- The investor disconnects the hardware wallet, which contains the public and private keys, and the information remains offline.
Types Of Cold Wallets
Paper Wallets
The basic form of a cold wallet. It is a piece of paper with private and public keys printed on it. The holder can simply print the paper online with an offline printer. The paper is then folded in a special way, sometimes even laminated, and stored in a safe place. The main drawback is that if the wallet is lost or destroyed there is no way to restore the access to your funds.
Hardware Wallets
The most known option for cold storage of crypto is hardware wallet. These are the devices that look like small USB drives, sometimes they even have displays for easier operation. They need to be connected to another device to start managing crypto, PC or tablet are enough. It is important to store your crypto hardware wallet in a safe place too as recovery could be problematic. Make sure to buy these from official retailers only as fake ones could contain viruses.
Sound Wallets
Sound wallets may seem exotic for many. This is an expensive way of storing keys. Store your keys by encrypting them and recording it as a sound file on CD or vinyl record. The key could be deciphered with the help of a spectroscope app.
Deep Cold Storage
For those who think that storing hardware wallet in a safe is not secure enough there is an option. Deep cold storage is very inconvenient and requires time and effort for you to access your keys. For example, you can bury a waterproof container with your hardware wallet in your garden. It usually takes several days to get the access to your funds back.
Offline Software Wallets
These wallets are similar to hardware wallets but may be more complex. An offline software wallet splits a wallet into two accessible platforms – an offline wallet that contains the private keys and an online wallet that has the public keys stored. The transaction is generated online and signed offline that way keys stay secure in an offline part of a wallet.
Pros and Cons of Cold Storage Options
Advantages of cold storage
- Security
There is no need to trust your private keys to a third party. The wallet is not connected to the internet so it is very hard to hack. Anyway, you better not carry your device in your pocket as it could be easily stolen. Make sure to store it in a safe place. Most hardware wallets are protected with a pin or even biometrics.
- Recovery
When setting up your wallet you need to write down a recovery phrase, which is unique and generated by your device. This is very important because if you lose your device there will still be a chance to restore your assets with the help of a given phrase.
Disadvantages of cold storage
- Delays
You definitely need more time to access the cold wallet device and you can’t use it on the go as cold wallets need another device to operate. This way it is not suitable for quick transactions.
- High price
Most hot software wallets are free (some are even built in crypto gateways), whereas cold wallets cost money.
- Limits
Cold wallets are often limited in the number of cryptocurrencies you are able to store with their help.
- Harder to use
You need at least 10 minutes to set up a cold wallet.
- Inconvenient
Even with all the modern technologies it is less convenient to use cold wallets than hot wallets.