For crypto users and investors, the fear of having their funds stolen is a crippling one, especially given how news of crypto thefts have been making headlines in recent months. If one wants to take care of this problem in terms of storage, most experts will advise them to use cold storage. What is it? What makes it so secure? Are there any downsides to it? Let’s have a look:
What is cold storage for cryptocurrencies?
One’s ownership of bitcoins or any other cryptocurrencies is only as good as their holding of the private keys to these coins. Now, if these private keys are stored on wallets hosted by third party service providers or crypto exchanges, then the security of one’s crypto holdings becomes open to a great deal of risk. Cyber attacks, server crashes, minor coding flaws in the hosting platform, malwares etc. can make these private keys susceptible to theft, loss or deletion. The solution to all these issues is the use of cold storage wallets, which basically means generating one’s private keys to be stored offline, far away from any internet connection, that can open them up to phishers or scammers.
There are four main ways to store bitcoins in cold storage. The first and simplest one is to use a paper wallet, where the keys are simply written or printed out on a piece of paper and stored in a physical location. It is, needless to say, free of cost, and utterly convenient for someone who doesn’t want to go through the hassle of getting an electronic wallet. The second kind involves storing the private keys in a hardware wallet like Trezor or Ledger Nano S. These are electronic devices meant to sign transactions using the private keys to crypto holdings. The keys are stored offline and the devices provide the option of taking the help of a backup seed key to restore one’s crypto holdings in case the device is lost or damaged. The last two ways to store crypto in cold storage involves using a USB drive or simply your desktop computer without an internet connection.
Pros of Using Cold Storage:
1. Security: The very USP of cold storage is the guarantee of security it provides. Since it is not connected to the internet, it simply means that scammers cannot get to it using malwares and other web-based ways of swindling their ways into one’s account or device to siphon off their funds.
2. Extremely cost-effective options: If one chooses to go for paper wallets, they can basically store their private keys absolutely free of cost. If one chooses to use less secure options like USB devices or simply one’s trusty old PC, the costs also remain extremely low.
3. Ease of Usage: The use of cold storage wallets tends to be extremely easy as they involve simply copying the keys or scanning the QR code from a paper wallet or carry out the transaction using the dedicated function of a hardware bitcoin wallet. There is no need to constantly worry about checking the security certification of the wallet’s web page, enabling and using 2-factor authentication and so on.
Cons of Using Cold Storage:
1. Susceptible to Physical Damage: Paper wallets can get torn, burnt or spoiled because of water damage. They also have a high likelihood of getting lost. Hardware bitcoin wallets also aren’t immune to water damage. Although backup seed keys are usually available for the hardware wallets, the physical damage still poses a significant degree of problem.
2. Security and cost-effectiveness are inversely proportional: The most secure cold storage options, the hardware wallets are somewhat expensive. The cheaper options on the other hand, provide lower levels of security. Anybody with physical access to one’s USB drive or paper wallet can steal the codes and desktop PCs can also be hacked to compromise the security of such funds. Therefore, these options, despite being free or cheap, must be guarded really well to prevent a security breach.
Overall, the cold storage options for bitcoins and other cryptocurrencies are rather useful during a time of rampant cryptocurrency scams , giving a user quite the bang for his buck.