Cold Storage

Understanding Cold Storage

Cold storage, also known as offline storage, is a technique used to securely store and protect cryptocurrencies by physically isolating the wallet from unsecure networks, such as the public Internet. This additional layer of security ensures that the coins stored on the wallet are inaccessible to potential attackers.

When it comes to cryptocurrency wallets, there are two main types: hosted wallets and cold wallets. Hosted wallets, also referred to as hot wallets, are software-based wallets that can be accessed through a wallet service provider’s website. They are popular among users due to their user-friendly interface, convenience, and constant availability.

However, hosted wallets come with a certain level of risk. The funds stored on a wallet are protected by private keys. If these private keys are compromised, the funds can be stolen and permanently lost. Unfortunately, blockchain transactions are irreversible, and the identities of cryptocurrency users are anonymous, leaving little to no recourse for the original owner.

Cold storage offers a viable solution to this problem. By physically isolating the wallet from unsecure networks, also known as air gapping, the coins stored on the wallet remain secure. As long as the physical cold wallet is stored in a secure location, potential attackers are unable to access the funds.

Cold storage is utilized by both individuals and companies, especially cryptocurrency exchanges that hold custody over customers’ funds. There are various methods of cold storage, but the most commonly used ones are paper wallets and hardware wallets. A paper wallet is a physical piece of paper that contains the wallet’s public and private keys. On the other hand, a hardware wallet is a specialized device, similar to a USB drive, that needs to be physically connected to a computer in order to access the funds.