What is Cold Storage in Cryptocurrencies?

• Toshendra Kumar Sharma
• January 08, 2018

The world economy has been very shaky in the past few years. Under such circumstances, there has been an increasing inclination towards an alternate currency which is also known as Cryptocurrency. Bitcoin is the oldest virtual currency and by far the most popular and valued one. It came into existence in January 2009, and since then we have seen it growing. There are some reasons which make cryptocurrencies favored over the traditional currency, the first being it is easy to transact, followed by low fees, no government regulations, and control.

What makes the use of Cryptocurrencies questionable?

Although cryptocurrencies merge as a popular option, there is something else which has also emerged as a challenge, and that is the security of the money.  A new generation of software has developed that searches for the digital wallet(explained later) where you store the virtual currencies. This software helps the malicious hackers to hack your account, or you may also encounter the hacking while exchanging the cryptocurrencies.

Since this currency lacks control, there have been increasing cases of hacking and fraudulent practices which makes the use of Bitcoins and other cryptocurrencies questionable. The reason behind this is the lack of regulatory framework development which leaves the owners helpless as they cannot trace the resources.

It is true that Bitcoins and other virtual currencies lack regulator framework and there are more susceptible to get stolen thus; it raises an important question here, “Where do you store Bitcoins securely” Well, the answer to this, nowhere. Bitcoins are accessed through keys, and these keys are addresses and codes. These codes are stored in the wallet which is also popularly known as a digital wallet.

Well, if you are doing an exchange in Bitcoins or have passed any other cryptocurrency, it’s crucial that you must use the trusted websites like Bitstamp, FlexCoin.

However, despite all these, there are still acts of fraudulent that surface and question the regulatory framework of virtual currencies.  A new of storing the cryptocurrencies offline has emerged and is popularly known as COLD STORAGE.

What is cold storage in Cryptocurrencies?

When we talk about cold storage, then it refers to keeping the reserve of cryptocurrencies offline. It becomes a must in case you are dealing with bulk Bitcoin or other virtual currencies transaction.

Here is an example to illustrate the same- Bitcoin usually offers instant withdraw. To cut down the invasion by the intruder who could steal the entire reserve breaching the security, the operator keeps the bitcoin reserved in cold storage, in simple words; this is not present on the web server or computer which ensures that the currency is safe. Also, the operator only keeps a limited amount or the desired amount on the web server.

Pros of Cold Storage:

• It is a great place to hold large amount of coins for a longer period
• It can keep the money away from the web server to make it safe

Cons of Cold Storage:

• There is a possibility of external damage caused by the carelessness, but it can be recovered if you have a recovery seed.
• Setting up this can be a daunting task for the beginners.
• As compared to online exchange, this is not considered to be ideal for quick and daily transactions.

Methods of cold storage:

• Storing cryptocurrency on a USB drive or hardware
• Paper wallet
• Use an offline Bitcoin Hardware wallet

Hardware wallets

These are physical wallet where you can store your cryptocurrencies. They are available in different forms, but the most commonly used is the USB stick. Although, they are free from frauds and hacking, yet they are not entirely infallible. Make sure if you are opting for hardware wallet then you are not choosing for the ones which were pre-owned at some point in time.

Some of the hardware wallet that you can use :

• Trezor
• Keepkey
• Ledger
• Vault0x (Wearable Hardware Wallet)

Paper wallets

Undoubtedly these are the safest way when it comes to cold storage for cryptocurrencies. In simple words, paper wallets are an offline way of saving cryptocurrencies. It involves printing the public and private keys on a piece of paper which you can store. These printed keys are in the form of QR codes. Thus, every time you need to make a transaction or exchange, you can do so by scanning the code.  Since you are storing the keys with you away from the web server, there is the least possibility of it being stolen. However, you must understand the fact that keep the paper having the QR codes must be kept safely so that it doesn’t fall into the wrong hands.