What Is Cryptocurrency Cold Storage?

Since the launch of Bitcoin in 2009, the world of cryptocurrencies has grown larger and more popular, particularly in recent years. There has been an increase in the usage and acceptance of virtual currencies alongside a growing number of tokens and investors. However, with the increase in prominence, a higher incidence of thefts, fraud, and hacking has also come. Because there is no regulatory framework for virtual currencies, there is often no recourse for owners who become victims of fraud or theft.

The onus to keep cryptocurrency secure typically falls on the investor. Users must decide how to store their cryptocurrency in the safest, most secure way possible and still be able to access them.

So, where should you store your cryptocurrency? Cold storage is one of the most secure storage methods—find out what it is and learn some of the most common techniques for keeping your cryptocurrency safe.

Key Takeaways

  • Cold storage refers to taking your cryptocurrency keys offline so that they are more secure.
  • Cold storage is less convenient than other security methods, but that means it is more secure.
  • There are several different cold storage methods to choose from.
1:29

What Is Cold Storage For Bitcoin?

What Is Cryptocurrency Cold Storage?

Cold storage is removing your cryptocurrency keys from your wallet and storing them somewhere that is not connected to the network or internet. Additionally, cold storage methods shouldn't have the ability to communicate with any other electronic device unless it is physically plugged into that device when you're accessing your keys.

Cold storage became a concern early on in cryptocurrency's development because of concerns over key theft by hackers. Originally, it consisted of writing down the keys on a piece of paper and removing them from the wallet. Cold storage has since advanced because users have billions of dollars worth of cryptocurrency.

Understanding Cryptocurrency Cold Storage

It's important to explore the concept of a cryptocurrency wallet to understand storage. For cryptocurrency users, wallets function somewhat similarly to physical wallets, which hold cash. However, these wallets hold cryptocurrency keys. They are digital storage tools that have both a public and private key.

These keys are strings of cryptographic characters necessary to complete cryptocurrency transfers to or from a wallet. The public key is similar to an email address—it identifies your wallet so that other users can send you coins. The private key is like your email password, used to access your email account to check your email.

For safety, you can store the keys somewhere other than your wallet—if the storage medium is connected to the internet, it is referred to as being hot; cold storage is not connected to the internet.

1:44

Cryptocurrency Wallets Explained

Cryptocurrency Cold Storage Methods

The most commonly used cold storage methods are paper wallets and hardware wallets. However, the number of cold storage techniques is limited only by the user's imagination. Some are more obscure, while others can be ultra-secure.

Paper Wallets

Paper wallets are probably the least safe or secure cold storage method. It involves printing your public and private keys on paper and possibly adding a QR code that can be scanned to make transactions faster. A paper wallet with a QR code contains all the information needed for spending the coins, so its safety is crucially important. Paper wallets can be misplaced, the ink can fade, or you could accidentally leave one on your desk and spill coffee on it. If you choose this method, be sure to have a safe box or other secure storage method.

Hardware Wallets

Hardware wallets are storage devices that look like a USB drive that can be plugged into the device you use to access your wallet. Hardware wallets are one of the more safe and secure ways of placing your keys in cold storage. You can use anything from a standard USB storage drive to an advanced device with a battery, Bluetooth, software, and other features.

Air-gapped devices have no connection ability and are more secure than ones that can connect wirelessly. You can buy commercial hardware wallets from retailers and merchants; many are water and virus proof—some even support multi-signature (multi-sig) transactions. Multi-sig is a cryptocurrency signature method that requires more than one user to approve a transaction using private keys.

Many advanced hardware storage devices are available, but it's important to remember that the less convenient a storage method is, the more secure it is. Likewise, the fewer features a method has, the more secure it is.

Sound Wallets

Sound wallets are an obscure and expensive way to store your keys, depending on your chosen medium. Sound wallets involve encrypting and recording your private keys in sound files on products such as Compact Discs (CDs) or vinyl disks (records). The code hidden in these audio files can be deciphered using a spectroscope application or high-resolution spectroscope.

Deep Cold Storage

Placing your hardware wallet in your safe is secure, but it isn't considered deep cold storage because it is easy for you to access. Deep cold storage is any method that is very inconvenient and requires time and effort to retrieve your keys. This could be anything from placing your hardware wallet in a waterproof container and burying it six feet down in your garden to using a third-party service that stores your cryptocurrency keys in a vault that requires multiple steps to access.

Burying your keys deep in the garden has several drawbacks like lots of digging and remembering where you buried it, but so does the ultra-secure vault service. Vault services generally require your identity, proof of address, or other means of identification. Additionally, it can take hours or days to access your keys, depending on where they are physically stored.

Is Cold Storage Best for Cryptocurrency?

Cold storage removes your private keys from your wallet, so it is currently the best method for storing your cryptocurrency private keys because it denies anyone access to them.

What Happens When You Put Cryptocurrency in Cold Storage?

When you place your keys in cold storage, they are removed from your wallet. You still see your cryptocurrency in your wallet because owneship is stored on the blockchain, but you cannot use them until you move the keys you want to use back to your wallet.

Is Coinbase Wallet Cold Storage?

The wallet provided by the exchange Coinbase is not cold storage. However, Coinbase offers a vault to all customers, which takes private keys and stores them offline. For institutions, the exchange provides cold storage through Coinbase Custody, a third-party fiduciary with offline storage.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Coinbase. "How Do I Set Up a Vault?"

  2. Coinbase. "Coinbase Custody."

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