The Importance of Cold Storage for Cryptocurrency

When a user stores crypto, they are effectively storing the private key to the account that holds the cryptocurrency in a cryptocurrency wallet.

Different types of wallets prioritize security in various ways, with cold storage offering the highest level of protection for private keys.

What is cold storage for cryptocurrency?

Cold storage essentially means that a user is storing their private keys offline in a way that they have never touched the internet. The term cold wallet is used to describe a device or method for the offline storage of cryptocurrency account keys.

Since keys are kept offline, cold storage is considered more secure than the alternative: hot storage.

Hot storage refers to software, apps, and browser-based wallets like MetaMask or Phantom that maintain a connection to the internet. This means that they could potentially be exploited by a malicious actor to intercept private keys during a transaction signing using malware or phishing scams.

The rationale of an offline wallet is that it leaves no online footprint for bad actors to follow.

Types of crypto cold storage

There are two different types of cold storage wallets – hardware wallets and paper wallets.

Hardware wallets

Hardware wallets are devices built specifically for the storage of cryptocurrencies. They are usually designed to be small and discreet, with the appearance of a USB stick, which includes a small viewing screen. The device will connect to the internet using a USB connection to an internet-enabled device, while some hardware wallets also offer connectivity via Bluetooth.

The leading manufacturer of consumer wallets is French firm Ledger, which issues the Ledger Nano X and older Ledger Nano S, as well as the new Stax device with a touchscreen. However, there are other reputable wallet makers, including Trezor, with its flagship product Trezor 3, and Cypherock, which has developed a novel method for key recovery.

Hardware wallets are considered a more secure and sophisticated means of cold storage than the alternative – paper wallets. However, hardware wallets come with a cost since you need to purchase the device, whereas paper wallets are free.

Paper wallets

Paper wallets were the earliest and most rudimentary form of cold storage. A paper wallet is simply a printed document with the private keys on it, or a QR code representing them.

Paper wallets are a low-cost and relatively accessible alternative to hardware wallets, but they are a potentially riskier way to store crypto. If the paper document is lost or destroyed, the cryptocurrency becomes inaccessible forever as there is no backup or recovery option. Further, creating copies duplicates the risk that the document will be lost or stolen.

Furthermore, sending funds via a paper wallet can be less secure, as you need to send funds to a software wallet that supports paper wallets first. This means crypto must still pass through a hot wallet to become usable, which exposes it to online risks.

Benefits of cryptocurrency offline storage

The main benefit of cold wallets, and the sole reason that most people use them, is their enhanced security over hot wallets. Online scams are rife in crypto, and hot wallets could be at risk from cyber threats such as malware, ransomware, viruses, or more. Keeping keys offline reduces or even eliminates this threat, giving peace of mind.

Drawbacks of cryptocurrency offline storage

While cold storage provides superior security for crypto keys, it's important to be aware that not all cold storage solutions are created equal.  Functionality and convenience can vary depending on the specific wallet type, manufacturer, and model.

Generally, the same features that make cold storage ideal for security also make crypto relatively inaccessible, meaning that cold storage often isn’t suitable for traders or anyone who needs access to liquid funds.

Further, the online nature of software wallets like MetaMask means they can be used as Web3 gateways to connect to decentralized applications.

However, some solutions are being developed. Ledger, for example, has created the Ledger Live app, which merges some features of hot wallets, such as Web3 connectivity, with the Ledger cold storage devices. Another alternative is to use hot wallets only for low balances of liquid funds and keep larger holdings in long-term cold storage.

Cold storage may only be as safe as the device or paper wallet itself, depending on the recovery options available from the wallet maker.

Security precautions for secure crypto storage

Despite the relative security of cold storage wallets, there are still some precautions that should be followed.

• Keep the wallet device safe, perhaps in secure physical storage.
• Keep any recovery keys safe in a separate location from the device itself.
• Order hardware devices directly from the manufacturer rather than a third party, as devices can be tampered with in the supply chain.
• Never take used or secondhand hardware wallets from anyone. You never know who may have copies of the keys.
• Ensure you keep firmware up to date and always run the latest version.

Cold storage essentials

• Cold storage of cryptocurrencies means private keys are kept in an offline wallet, which is considered more secure than hot storage using wallets connected to the internet.
• Hardware wallets such as Ledger, Trezor, and Cypherock are the leading types of cold storage, but paper wallets offer a cheaper and riskier alternative.
• While cold storage is considered safer, security precautions are still necessary to keep the device and recovery keys safe from loss or theft.