Do you know why we keep things in cold storage? In general, not with respect to cryptocurrency? I am sure you know the use of cold storage. Well, we keep things in cold storage to preserve them so we can use them at a later stage. The best sample is a refrigerator – you keep stuff in it so you can use them at a later stage. Similarly, we have Cold Storage In Cryptocurrency. It helps to preserve your digital assets if you plan to hold them for the long term. You know cryptocurrencies are decentralized, and hence it is your responsibility to store them safely. If your coins are stolen or lost, you will not be able to do anywhere to make claims and get them back.
What is Cold Storage In Cryptocurrency?
Now that you know the need for cold storage, it will be a cakewalk to understand cold storage. Cold storage is a storage option in which you store your keys offline. If your crypto wallet is not connected to the internet, we categorize it as a cold wallet or cold storage. There are different types of cold storage wallets.
Since it is offline, it offers high security to your coins. When your keys are stored online, it is a risk. In the past, we have seen so many cases where investors have lost millions because of hacking. Hackers won’t be able to do much as keys are not available online in cold storage.
How does Cold Storage In Cryptocurrency work?
We have discussed the concept of private and public keys earlier. The crypto storage works to protect your keys. In cold storage, your keys are offline all the time. They go online only at the time of transaction.
The public key, as you know, identifies specific wallets during a transaction. The private key grants access to the wallet having crypto.
Let us assume you have a hardware wallet, and you need to do some transactions. Hence you connect it to your computer with internet access. If you want to send crypto – an address is generated for the transaction. You can send your crypto to the generated address using your private key. Once the transaction is complete, you disconnect your hardware wallet from the computer, and all the information is offline and completely safe.
Types of cold storage wallet:
Below are the different types of cold storage wallets –
Hardware wallets –
It is the safest of all cold storage wallets but comes with a cost. It is an electronic device that signs transactions through the private keys which are stored offline. It has a backup seed key. You can recover your funds if your hardware wallet is lost or damaged. If you plan to buy cryptocurrency today and plan to hold it for long, you should go and buy a hardware wallet. These are not easily available, and you have a long wait time, so better order as soon you invest in crypto.
Paper wallets –
It is a free wallet that contains a pair of your public and private keys on a piece of paper. Your private keys are generated offline, and once you transfer the coins to the paper wallet’s public address, your coins are safe.
USB drive –
Not the safest cold storage option and hence not recommended. You can export your private keys and save on the USB drive. However, the issue is the USB drive itself can get stolen by someone. The person will get access to your coins. Also, the USB is prone to hardware failure.
Desktop wallets –
These are clients that only exist on your computer. You use this to export files of encrypted private keys in an offline environment.
Should you use a cold wallet?
You will also find hot wallets in the market which are connected to the internet. When it comes to security, cold wallets are more secure. If security is of utmost importance to you, you should always have cold storage. When it comes to convenience, hot wallets are more convenient. You can quickly send and receive crypto.
So which wallet to use? The best approach for you would be to keep your long-term investment in cold storage and the coins you plan to use for trading in the hot wallet.
We hope the article was helpful and you understand the need for a cold storage wallet in long-term investing and which wallet to have for your coins.