Over the past decade, cryptocurrencies have drastically grown in popularity. At one point it seemed like everyone wanted a piece of it.
However, the crypto market has taken several huge hits recently. In 2021, Bitcoin’s prices saw a massive drop as the prospect of rising interest rates and reduced liquidity in the financial markets.
Even more recently, the recent downfall of FTX has made investors nervous, and it is understandable why people might be itching to get rid of their crypto as soon as possible.
These recent developments have taught us that it might be a good idea to take your crypto off exchanges and put them into cold storage.
What is cold storage?
Putting your crypto into cold storage simply means taking them offline and storing it in a digital wallet. This offers a number of advantages. Since these digital wallets are not connected to the internet, it makes your crypto assets harder to steal.
This method is much safer than simply leaving your crypto in an exchange. This is because you will only be able to access your crypto assets if the exchange is able to distribute your funds to you.
Should anything go wrong with the exchange, such as a hack or mismanaged funds, your money might be gone for good.
There are some downsides to storing crypto in cold storage. For one, doing so will make your assets far less liquid, thus making it harder to trade or cash out quickly.
This is due to having to go through more protective steps to access your funds. However, the safety that cold storage offers might just be worth the extra effort.
Types of cold storage
1. Hardware wallets
Arguably the most common type of cold storage. They are more or less an advanced version of the USB drive that allows you to store your private keys in an offline and portable manner. In order to access your crypto keys, you will have to plug your hardware wallet into a computer.
Your private crypto keys are essentially embedded into your hardware wallet. As such, when you go to send or approve a crypto transaction, instead of copying the key or even having to pull it up on the screen, you can just click a button through the wallet to authorise transactions. This reduces the chance for your keys to be compromised.
While hardware wallets are definitely one of the more secure ways to store your crypto assets, there are still downsides to it. For example, if you forget your wallet’s pin number, or if you lose the physical wallet itself, you will typically have a recovery phrase that you can use to recover your private key to access your funds from another wallet.
However, if you forget or lose that phrase, then you might be out of luck. The loss of the recovery phrase is one of the most common ways of losing cryptocurrencies. On top of this, it should be noted that hardware wallets are not exactly cheap either.
2. USB Drive
Are hardware wallets a little too pricey for your tastes? Then maybe you can try using a traditional USB flash drive to store your private crypto keys. This is a much cheaper and affordable option for cold storage, but this is also nowhere near as secure as having a dedicated hardware wallet. USB drives can’t enable transactions at the click of a button either, so there is an added risk factor there. Overall, they are pretty much only useful for storing your private key offline. Generally speaking, USBs should be used as a temporary solution and are not suited for long-term storage.
3. Paper wallets
If you want to get even more low-tech, putting your private key or a QR code on paper and storing it somewhere is definitely an option, albeit not a recommended one. Think about how many scraps of paper or receipts you have forgotten about or misplaced in your wallet throughout your lifetime. If you can imagine that, you can also imagine why this is not the greatest idea for storing your private keys. This should be an absolute last resort, and even then, a temporary solution at best.
Putting your private key or a QR code on paper and storing it somewhere is a very low-tech form of cold storage — and not a good one at that. Think about how many papers you’ve misplaced, damaged, or forgotten about in your life.
4. Sound wallets
Sound wallets seem to be something straight out of a spy film. They involve encrypting and recording your private keys in sound files on products such as CDs or vinyl disks. The code hidden in these audio files can then be deciphered using a spectroscope application or high-resolution spectroscope when needed. This is a very cool method of storage, but it can be prohibitively expensive depending on your chosen medium of storage.
Is cold storage really the best way?
In the end, cold storage is a method that removes your private keys from your wallet. As such it is currently the best method for storing your cryptocurrency private keys.
At least, it works by denying access to anyone who does not know how to retrieve it. It is certainly a much safer option compared to hot wallets or keeping your crypto on the exchange.
If you need some more tips on keeping your cryptocurrencies safe, here is an article on keeping your digital wallets safe.