What Is Cold Storage?

Cold storage refers to cold wallets used to store one’s cryptocurrencies.

Cryptocurrency wallets used to receive, store and send cryptocurrencies are usually divided into two categories: hot and cold wallets.

Hot wallets, also known as hosted or software wallets, are software that can be accessed via the website of a wallet service provider and are the more widespread option owing to their ease of use, convenience and constant availability.

Access to the funds stored on a wallet is secured by a single or multiple private keys in the cases of single-signature or multisig wallets respectively. If the private keys become compromised, for example, as a result of theft or via a phishing attack, the funds stored on the wallet may end up stolen and permanently lost. In such a case there is little to no recourse for their original owner due to the fact that blockchain transactions are irreversible and the identities of cryptocurrency users are anonymous.

Cold storage provides an additional layer of protection for user funds by air gapping the wallet, i.e. physically disconnecting it from unsecure networks, most importantly the public Internet, when not in use. As long as the physical cold wallet remains in a secure location, it is impossible for potential attackers to access the coins stored on it.

Cold storage is used by individuals and, especially, by companies whose business model involves holding custody over customers’ funds, such as centralized cryptocurrency exchanges.There are many different methods of cold storage, but the most popular ones are hardware wallets, and to a lesser extent, paper wallets. A paper wallet is simply a physical piece of paper with the wallet’s public and private keys printed on it. A hardware wallet is a special device, like a USB drive, which needs to be physically plugged into a computer in order to access one’s crypto assets.