Good read compiled from a few sites:
What is Cold Storage in Cryptocurrency (aka Cold Wallets)
Some of you might know that if you hold your private keys, then only you own your crypto coins. If you don’t own your key, then you don’t “own” your coins. (See our post on Bitcoin Private Keys.)
- It’s important to store your digital assets such as BTC, ETH, or LTC away from exchanges and hosted wallets. If you are not doing this, you are at risk of losing all of your coins in an instant.
Exchanges and third-party wallets hold your private keys on your behalf. This is a big risk because if something goes wrong with their servers, or if they are hacked, then your coins are gone. If you use a hold your cryptocurrencies via a third-party wallet, you need to understand their policies and procedures for safety of crypto assets, any insurance and guarantees.
If you are not actively trading your cryptoassets via an exchange, don’t store your coins for more than 1-2 days with any hosted or third-party service. Make use of the “cold storage” tools your wallet providers makes available.
Which brings us to the million dollar question:
- Where should you keep your cryptocurrencies?
- Which wallets/methods are the most reliable?
Cold storage (aka cold wallets) means generating and storing the crypto coin’s private keys in an offline environment, away from the internet.
The online environment is very vulnerable to hacking, as we keep seeing how ransomware extorts many people around the world. Also, we can never forget the Mt.Gox incident. So to avoid such situations, it is essential that you keep your coins safe in an offline manner. Luckily, the cryptocurrency space has matured a bit, and there are enough cold storage options available.
Some of the most cold storage options are:
A paper wallet is the cheapest form of cold wallets available. It is free to use and contains a pair of private/public keys printed on a piece of paper. In this method of storing, your private keys are generated offline so you need not worry about security. And once your transfer the coins to paper wallet’s public address, you are safe. For different cryptocurrencies, there are different paper wallet clients available. You can make any number of paper wallets whenever required using these clients.
Cryptocurrency Hardware Wallets (safest)
Hardware wallets are the most robust cold storage option for cryptocurrencies. However, this robustness comes with a price tag.
A hardware wallet is an electronic device. It signs transactions through the private keys which are stored offline. It also allows you to recover your funds using a backup seed key if the device is damaged or lost. Since most of these hardware wallets have a waiting period of a month or two due to huge demand, you should order one as soon as possible. If you are looking for a single recommendation as the best Bitcoin hardware wallet, then you should look no further than the Ledger Nano S.
At the time of writing this article, there has been no reported theft or loss from using hardware wallets.
Storing Cryptocurrency in USB Drive (Not so safe)
Using a USB drive as a cold wallet is one of the easiest ways to cold store your coins.
With this, you can export and save your private keys on the USB drive.
But this choice comes with its trade-offs, as anyone with access to your USB has access to your crypto coins. More over, hardware failures are common with USB.
Cold Storage Providers
Cold Storage Providers are companies that connect to your wallet and exchange provider, and allow you to pull your cryptoassets offline. They can be used to export files of encrypted private keys in an offline environment.
In these pieces of software, the private keys are stored offline on servers controlled by the Cold Storage Provider. The cryptoassets are stored offline and can not be hacked except while during the transfer of funds to and from the Cold Storage Provider. Most Cold Storage Providers work directly with the Crypto Wallet and Exchange companies. The downside to their offline protection is that it normally takes 48 hours and double verification of request to return the cryptoassets to the Wallet or Exchange and then onto the end owner.