What is Cryptocurrency Cold Storage?

With Bitcoin leading way, the cryptocurrency space has grown only stronger and stronger with time since 2009. There is increased usage worldwide as well as frameworks and attempts in place for general acceptance for virtual currencies. There are more advanced softwares, forks and derivatives, along with the rising number of users.

However, another aspect of this increased popularity has been the consequent increase in hacking and fraudulent practices. Moreover, in 9 years of development, we’ve still been unable to form appropriate and precise regulatory institutions whom to follow. This leaves not many resources to the user in case of fraud of theft, which we witness in news footages day in and day out.

So, where do you store your Bitcoins (and altcoins)? Technically nowhere, as it’s not the Bitcoins (cryptocurrencies) that are stored. They are accessed through keys (addresses and codes) which are kept in a wallet (also known as a digital wallet). Thus, it’s the digital wallet holding the public and private keys that needs to be protected by storing at a safe place.

Enter: Cold Storage for cryptos

There are more than one ways to secure a digital wallet containing keys and passwords to cryptocurrencies and important financial assets. It could be secured via basic encryption technique (using a strong password), wallet backup, multisig technique (involving transaction system in which more than one people need to approve release of funds) and the most fascinating one yet, cold storage.

Cold storage is another way to secure cryptocurrencies. It involves storing Bitcoins (or altcoins) offline, i.e; away from any internet access. Keeping Bitcoins offline substantially reduces the threat from hackers. The method of cold storage is less convenient than encrypting or taking a backup; thus it is usually done by keeping some money in the system for regular spending and putting the rest in a cold storage device. This reduces the effort of digging out coins from the cold storage every now and then for everyday use.

The very practice of splitting out reserves and expendables is carried out by exchanges that facilitate crypto trading. They deal with huge amounts of cryptocurrencies and are targets for hackers. Hence, they opt to keep majority shares in cold storage, and knowing withdrawal trends, keep only the amount on server to meet requirements.

Common Cold Storages

  • Paper Wallet is a way to save cryptocurrencies from hack and theft by printing the private keys and passwords on paper. This paper has a QR code which can be scanned and added to a software to make quick transactions. It’s usually a good idea to encrypt as well as duplicate the paper wallet as it contains the all important passwords.
  • USB drives are also used to keep the secret keys. They’re accompanied by a safe or deposit box to keep them absolutely safe. This might be the hardest form of cold storage.
  • Sound Wallets are another way to secure virtual currencies, where private keys are encrypted in sound files on compact discs and vinyl disks. The code hidden in these audio files can be deciphered using a spectroscope app or high-resolution spectroscope.
  • Hardware Wallets are also becoming an interesting theme among cold storages. These are small, water and virus proof devices and even provide multi signature transactions. Pi-Wallet and BitSafe are examples of such hardware devices.

In addition to these cold storages, the concept of deep cold storage service is also picking pace. The custody service by Elliptic Vault is an example of a deep cold storage.

So, impenetrable storage methods for bitcoins and altcoins are something to look forward to, for the future when it is expected that cryptocurrencies will be globally accepted as means of currency. With an ever widening range of options, cold storage based assets will be safe harbor for investors and traders alike.

There has also been tight lipped comments from many about a DNA-based cold storage for cryptos. With limitless possibilities, this is a space worth watching out for.

Razi Khan

Researcher, Electrical Engineer and a teacher, Razi is one who takes great intrigue in the prospects of blockchain and cryptocurrencies (BTC in particular) while contributing a critical approach over the subject regularly. Contact the editor at editor.news@blockpublisher.com

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