Cryptocurrency such as Bitcoin relies on the use of both public and private keys, the first of which allows the receipt of cryptocurrency transactions and the second of which allows the owner to prove and unlock the cryptocurrency received through that transaction. Cold storage allows this information to be stored in physical forms that are offline in order to reduce the likelihood that they will be electronically intercepted or hacked.
Whether you’re an expert investor or new to the world of cryptocurrency, you could likely benefit from expert professional help. Consider speaking to a financial advisor to better understand how to move forward with an investing strategy.
What Is Cold Storage for Bitcoin?
Cold storage refers to the various non-digital, physical methods of holding Bitcoin cryptocurrency tokens off of the internet. Even though cryptocurrency is digital currency, users can still go through these physical methods to store the important information they need to access and trade the coins that they do own.
In the eyes of many experts, cold storage methods (which includes cold wallets) are preferable to hot storage methods (which include hot wallets). This is because hot wallets, being digital storage options, are more susceptible to being hacked.
Hot wallets are digital cryptocurrency wallets that are available in online and desktop forms, can hold any cryptocurrencies (including less mainstream types of coins) and are, for the most part, free.
By contrast, cold wallets are actually physical devices. They help you keep your Bitcoin completely offline.
Types of Cold Storage
There are various kinds of cold wallets and it’s important to remember that not all wallets support all types of cryptocurrencies.
Paper wallets involve the use of a computer and printer entirely disconnected from the internet. Users will download a paper wallet generator before disconnecting, then generate the bitcoin address / public key(s) and private key(s). The next steps are to print the paper wallet(s), delete downloaded files and finally send cryptocurrency to each wallet.
Hardware wallets store the private key(s) not on paper but on a secure hardware device. These devices sometimes look like small USB devices. Users connect them to a personal computer and download a program or visit a website that the hardware wallets can interact with. Only transaction data leaves the wallet, not the private key itself.
Deep cold storage takes the idea of cold storage one level further, and can be useful for assets that someone plans on leaving untouched for a long period of time or even indefinitely. They require a recovery phrase to finally access. Users can store the recovery phrase on paper and keep it in a safe place.
Pros and Cons of Cold Storage
While you can actually have some cryptocurrency in cold wallet storage and some in hot wallet storage to see how each works for yourself, it might be useful to first go through the benefits and drawbacks of cold storage in particular.
- Cold storage is portable. You can have your cryptocurrency with you wherever you go.
- Devices are small and compact. Alongside being portable, these physical storage forms can be very discrete, so that compromising security is not an issue.
- You get an added layer of protection from hackers. Because hot wallets are digital and online, they’re vulnerable to hacker attacks and attempts at scamming. Cold storage options prevent this issue.
- Potential to complete transaction with trusted traders. As a result, in-person transactions are possible, thus allowing users to potentially be more certain that they are dealing with people they trust.
- You’re not immune to loss or damage. Because they’re physical, cold storage hardware or paper documents can still be lost, stolen or broken in person somehow.
- Cryptocurrency limitations. A smaller variety of cryptocurrencies can be stored on cold storage forms.
- Can be on the expensive side. For the most part, hot wallet / storage options are free to use.
Does Cold Storage Cost Anything?
Cold storage options range from $50 to $200. Some are more advanced and some are simple storage devices. Some specific brands for cold storage options are Trezor, Ledger Nano S, KeepKey and CoolWallet S.
If you own Bitcoin, be sure to consider the many options available for you to store it and your private keys. While hot wallets are digital forms of storage, cold wallets may provide an added benefits even if they’re more old-fashioned. You can use a cold storage wallet to store this information offline, which keeps it safe from hacking and other web attacks.
Tips for Cryptocurrency Investing
- Always do a little bit of number crunching on your own first. SmartAsset’s free investment calculator can help you determine what kinds of returns you need to reach your goals.
Photo credit: ©iStock.com/D-Keine, ©iStock.com/matejmo, ©iStock.com/alexsl