Cold Storage Definition: Most Secure Crypto Storage

Written by Sean GraytokUpdated: 20th Jan 2021
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With the rising popularity of Bitcoin and other cryptocurrencies, more people are looking for the best way to store their digital assets.

While keeping them in hot wallets is more convenient for everyday use, cold storage is the more secure option.

Crypto storage is often categorized as either “hot” or “cold,” but it’s really more of a spectrum between the two, and there are varying levels of security within each method.

This article will define cold storage, explain how it works, and list its pros and cons.

What is Cold Storage?

Keeping your crypto in cold storage means that your assets are not connected to the internet. Your crypto is stored on a hardware wallet, USB stick, or another encrypted storage device that can hold private keys.

Securing your crypto in cold storage devices, like hardware wallets, makes it impossible for hackers to access your assets, unlike using hot wallets.

However, self-custody comes with more responsibility as you have full control over your crypto.

If you misplace your storage device or it gets severely damaged, you could lose all your digital assets.

This is why it’s important to back up your crypto on-chain using your hardware wallet’s seed or recovery phrase.

Understanding Cold Storage

While cold storage is the superior option in terms of security, most crypto holders use both hot and cold wallets.

It’s common practice to hold most funds in cold storage and have enough online for daily transactions and convenience.

You can think of hot vs cold wallets the same way you differentiate between a leather wallet and a bank vault.

It would be dangerous to walk around with all the money you own, so you keep most of it tucked away at a bank.

It’s the same idea with crypto– you don’t want all of your crypto to be susceptible to hackers.

Types of Cold Storage

Paper Wallet

Paper wallets were once considered a great way to store crypto offline, but their flaws have become apparent, and they are now obsolete.

A website generated a single private key and bitcoin address for the user. The person would print out the keys and corresponding QR codes onto a piece of paper.

Crypto holders began to run into problems with their paper wallets, such as the paper’s deterioration or inexpensive printers producing faulty QR codes.

Additionally, paper wallets have just one address, so they promote address reuse, which abuses the participants’ privacy and security in the transaction.

Hardware Wallets

Hardware wallets are a bitcoin wallet that stores the user’s private keys in a secure hardware device, like a USB type thumb drive. They are the preferred method of cold storage for their simplicity and security.

Hardware wallets only keep the private keys safe and facilitate spending transactions. They cannot tell the user if they’ve actually received coins and in what quantity.

For example, one of the more popular cold storage devices, Trezor, generates the user’s private keys. They never leave the device, so they cannot be intercepted by malware.

A recovery seed is generated when the Trezor is initialized. All of its contents can be recovered on-chain using this seed and put into a new device.

Crypto holders often keep these devices in a storage facility, deposit box, or some type of apocalypse proof trunk. We’ll explain “deep cold storage” later.

Sound Wallets

Sound wallets are a less common way for people to store their crypto offline, but they may be one of the more creative options.

A company called “Sound Wallet” stores its users’ private keys as encrypted audio files on CDs or 7-inch vinyl disks.

Sound Wallet converts the user’s BIP38-encrypted private key into a 30-60 second sound file that just sounds like noise.

Holders can then use a high-resolution spectroscope, or a spectroscope mobile app, to decipher their code hidden in the static.

Like we said before, it’s common practice for crypto owners to store their assets across several devices, and sound wallets are certainly an interesting way to diversify one’s storage.

Deep Cold Storage

The “deep” part of cold storage ensures that the entire storage process happens in an offline environment.

While your normal cold storage device is offline, its wallet and private keys were generated online and a record of if it would remain somewhere on the internet.

Platforms like Bitstocks’ Gravity offer deep cold storage and make it possible by implementing these three steps:

#1. Your wallet and private key are generated offline.

The signing of these transactions occurs on a system not connected to the internet, ensuring it’s never exposed to a potentially compromised network.

#2. Your details are secured with encryption.

This ensures that your information is password protected even if your wallet file is intercepted by a bad apple.

#3. Your encrypted wallet file or paper wallet is stored at a facility with restricted access.

These locations are typically banking.

Deep cold storage is best for long term holders of large crypto portfolios. It is a great option for those who plan to pass their crypto onto heirs, who only need the seed phrase to recover the funds.

Pros of Cold Wallets

  • Assets are offline and less susceptible to hackers.
  • Can own your private keys.
  • Do not have to rely on third-party custodians.
  • Varying degrees of cold storage.

Cons of Cold Wallets

  • Less convenient than hot wallets (lower liquidity).
  • Typically cost between $50-$200.
  • More onus on the individual.
  • Vulnerable to physical theft.

Cold Storage FAQs:

What is the best cold storage wallet?

The most popular cold storage devices are the Ledger Nano X ($119), Trezor Model T ($170), and Ledger Nano S ($59).

They offer varying levels of customization and storage capacities. The Ledger Nano S is the preferred choice for crypto beginners that want to get their assets offline.

Are cold wallets safe?

Cold wallets are safe relative to hot wallets. They are not connected to the internet, unlike their warmer counterparts, and are therefore less susceptible to hackers. However, they are still vulnerable to physical theft.

How do cold storage wallets work?

Cold storage wallets are hardware devices that store a user’s wallet address and their private keys.

They typically look like USB drives and are the preferred method of securing crypto fortunes because they are not connected to the internet.

Bottom Line: Cryptocurrency Cold Wallets

While the security of exchangeshas improved, “only keep what you’re willing to lose” in wallets connected to the internet.

Fortunately, more and more platforms like Gemini are keeping up to 95% of their cold storage assets, and only the amount they need to handle the daily trading volume in their hot wallet.

If you own a large amount of crypto, cold storage is nonnegotiable. Get your e-fortune offline and enjoy the peace of mind that comes with cold storage.

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Sean Graytok
Sean Graytok

Sean Graytok is our Co-Founder and leading expert in investing and financial management. His work has been cited in leading industry publications, such as InvestorPlace and Business Insider. Sean is interested in the people and technologies that are improving the world.