Cold Storage: What It Is, How It Works, Theft Protection

What is a Cold Wallet?

A cold-wallet is used offline to store bitcoins or other cryptocurrency. A cold wallet, which was originally referred to as cold storage, the digital wallet is stored on a server that is not connected to the internet. This is safeguarding the wallet from unauthorized access, cyber hacks and other weaknesses that a system connected to the internet is susceptible to.

Methods of cold storage are beneficial for investors on their own, but cryptocurrency exchanges and companies involved in the crypto space utilize this type of wallet. Cold storage could also be used to describe other types of storage methods for inactive data, like documents for regulatory compliance photos, videos, and backup information.

Key Takeaways

The majority of digital cryptocurrency wallets are, however, hackers may obtain access to storage devices despite security measures that are designed to stop theft.
Cold wallets are a method to keep cryptocurrency tokens in a safe place.
Utilizing a cold-wallet cryptocurrency investors seek to prevent the hackers to access their holdings via traditional means.

Why do you need a Cold Wallet?

When a checking, savings, and credit card account linked to the traditional bank has been compromised, the bank is in a position to pay the lost or stolen money back to the account holder. However, if your crypto account or wallet has been damaged and your cryptocurrency tokens have been stolen, the owner is unable to recover their funds. This is due to the fact that most digital currencies are not centrally controlled and do not have the support of a central bank or government. So crypto investors must be cognizant about the measures necessary to ensure the security of their tokens. This is why there is a requirement to have a secure, safe medium of storage for bitcoins and other altcoins.

A bitcoin wallet is connected with the public and private keys of a bitcoin owner. All cryptocurrency storage methods involve the security of these keys as they grant access to funds in the wallet. A cryptocurrency owner’s private key is a specific string of alphanumeric characters required to gain access to the owner’s crypto assets for the purpose of spending. The public key is similar to an account’s username or email address, and can help find a place to deposit money that is being transferred to the wallet.

Two people making a transaction with a cryptocurrency like bitcoin, where one is both a seller and a buyer, will have to share their keys to facilitate the transaction. The buyer of the commodity or service sends the required number of bitcoins to the seller’s disclosed address for payment and the blockchain verifies that the transaction is legitimate and proves that the seller really has the money to pay. Once the payment is delivered to the address, the recipient can only access the funds using their private key. Therefore, it’s imperative for private keys to be secured because in the event of theft, bitcoins or altcoins could be unlocked and accessed from account without authorisation.

Cold vs. Hot Wallets What’s the Difference?

There are numerous methods of storage for cryptocurrency. Besides cold storage another of the most well-known methods is commonly referred to as “hot storage.” Hot wallets are ones that remain connected via the Internet. This includes wallet applications and some wallets that are provided through cryptocurrency exchanges. What are the advantages of cold and hot. warm storage in cryptocurrency?

Cost When it comes to costs, hot wallets usually beat out other wallets. The majority of hot wallets are free. Cold wallet options range from free (in the case of a wallet made of paper as explained in the next section) to as high as $200 to $100 for various kinds of hardware wallets.
Users experience: Because they already have access with the Internet, wallets that are hot tend to be the most convenient to users. There isn’t any additional process to connect the wallet online to allow for the transfer of tokens.
Security: The main reason cold wallets enjoy an advantage against hot ones is security. Hot wallets are highly secured, due to various security measures for cryptography. However, they’re not able to match the security of cold wallets in general.

To address the problem of selecting a hot or cold wallet for storage option, many crypto investors utilize both. It is common to hold some of your cryptocurrency in a hot wallet , to facilitate transactions and to store the remaining portion in a safe cold wallet.

What Can Cold Wallets help to prevent Theft?

Private keys saved in an online wallet that is connected to internet are at risk of network-based theft. With a hot wallet all functions needed to conduct a transaction are performed by a single internet-connected device. The wallet creates and stores private keys, digitally authenticates transactions with private keys and broadcasts the transaction that was signed to the network.

The issue is that after the signed transactions are posted online, a hacker browsing the networks might be in possession of the private keys that was used to sign the transaction.

How Does Cold Storage Work?

Cold storage can solve this issue through the signing of transactions with the private keys within an offline environment. A cold storage method shouldn’t have the ability to communicate with other electronic devices in the absence of being physically connected to the device at the time you’re using your key.

Any transaction initiated online is transferred temporarily to an offline account on a device like an USB drive, compact disc (CD), paper, or a hard drive or an offline PC, where it is then digitally signed before being transmitted to the internet network. Since the private key does not come into contact with an online server during the signing process in the event that an online hacker discovers this transaction will not have access to the private key used for it. As a result of this added security, the process of transferring to and from a cold-wallet device is somewhat more burdensome than the process for a hot wallet.

As an example, suppose you are a crypto-investor and have the tokens stored in a hardware wallet (see below for further details) the cryptocurrency transaction to acquire new tokens could be like this:

The user connects the device to an internet-enabled computer.
The investor can choose for receiving tokens. The device creates an address that facilitates the transaction.
The sender initiates the transfer tokens to the address generated above.
The investor disconnects the hardware wallet, which holds both private and public keys, and the information remains unaccessed.

Paper Wallets

The most basic kind for cold storage would be a wallet made of paper. A paper wallet is a document that has public as well as private keys written on it. In the case of a bitcoin paper wallet, it is possible to print the document from the bitcoin paper wallet tool online with an offline printing device. The wallet, or paper document is usually equipped with a quick answer (QR) number embedded into it so that it can quickly be scanned and then signed for the transaction.

The drawback to this medium is that if the wallet is lost, rendered illegible or destroyed, the person cannot gain access to the address where their money is. If you decide to use this method make sure you keep a safe container or another secure storage method for the paper wallet.

Hardware Wallets

Another form of cold storage is a hardware wallet that utilizes an off-line device or smartcard to generate secure keys that are offline. The Ledger USB wallet is an example of an electronic wallet that utilizes smartcards to safeguard private keys. Two other popular hardware wallets include TREZOR as well as KeepKey. The device is designed and functions like the USB drive. However, a computer and an app that runs on Chrome are required to store private keys offline. It is possible to use anything from a simple USB storage drive to an advanced device with a battery, Bluetooth software, Bluetooth and many other functions. Like a paper wallet, it is essential to store this USB gadget and the smartcard inside a secure area, as any loss or damage could end access to the user’s bitcoins.

Air-gapped devices have no connection capabilities, and are much less secure than devices that connect wirelessly. There are commercial hardware wallets from stores and retailers; many are waterproof and virus-proof–some even support multi-signature (“multi-sig”) transaction. Multi-signature is a cryptographic signature technique where more than one person to approve a transaction using private keys.

Sound Wallets

Sound wallets can be a mysterious and costly method of storing your keys, dependent on the type of medium you select. Sound wallets require encryption the private key of yours into sound files on products such as CDs or vinyl discs (records). The code hidden in these audio files can be decoded with a spectroscope software or high-resolution spectroscope.

Deep Cold Storage

The storage of your hardware wallet in your safe is secure however it isn’t considered deep cold storage simply because it’s simple for you to access. Deep cold storage refers to anything that is unpractical and requires patience and time to retrieve your keys. This could be anything from placing your wallet’s hardware in a waterproof container and burying it six feet down in your yard to using a third-party service that keeps your cryptocurrency credentials in a vault which requires numerous steps to access.

Storing your keys in the garden has several drawbacks, including lots of digging and recollecting where you put them there, but it is not as difficult with the vault service that is ultra-secure. Vault services typically require your identity or proof of address or any other form of identification. It can also take days or even hours for you to access your keys depending on where they are physically kept.

Cryptocurrency funds held in deep cold storage aren’t in a state of being readily available for transactions.

Offline Software Wallets

Additionally, those looking for cold storage options are also able to choose offline software wallets, which are very similar to hardware wallets but are more difficult process for novice users. A software wallet that is offline splits an account into two distinct platforms–an offline wallet that contains the private keys , and an online wallet which has the public keys stored. The online wallet creates new, unsigned transactions and transmits the address from the client to either the receiver or sender on the other side of the transaction. The unsigned transaction is then transferred to the offline wallet and is signed using the private key. The signed transaction is then transferred back to an online wallet which broadcasts it out to the Internet. Because the offline wallet does not get connected to the internet, its private keys remain secure. Electrum and Armory are frequently referred to as the top offline software wallets available in the crypto economy.

Users of cryptocurrency should make sure that the wallet of their choice is compatible with the currencies they transact with or trade in, as not all wallets support all cryptocurrency.

Is Cold Storage the best option for cryptocurrency?

Cold storage erases your private passwords from wallets. Hence, it is currently the best method to store your cryptocurrency private keys because it denies anyone access to the keys.

What happens when you put Cryptocurrency in Cold Storage?

When you put them in cold storage taken from your wallet. You still see your currency in your account since ownership is recorded on the blockchain, but they aren’t available until you transfer your keys that you would like to use back to your wallet.

Are the Coinbase Wallet Cold Storage?

The cryptocurrency wallet offered by the cryptocurrency exchange Coinbase doesn’t offer cold storage. The exchange does however offer cold storage. Coinbase has a secure vault available for all customers. It accepts private keys and keeps them offline. Institutions can use the exchange can provide cold storage with Coinbase Custody, a third-party fiduciary, with offline storage.

Why do we need cold Wallets?

Cold wallets provide a means to store cryptocurrency tokens offline in order to keep attackers from having the ability gain access to the wallet’s contents through traditional hacking methods on the internet.

What does a hot Wallet compare to a cold Wallet?

Hot wallets are usually inexpensive, and therefore cost less than cold ones but they are not as secure. protection against theft and unauthorized use than cold wallets. Because they’re already connected to the internet hot wallets are likely to be the easiest for userssince there is no extra step to connect the wallet to the internet to transfer tokens.