When it comes to crypto, having a good investment strategy might not be enough.
That’s particularly true these days, with a volatile market, a dragging crypto winter and the blowout of major crypto players shaking users all over the world. If you're looking to offset risk and give yourself some peace of mind, perhaps you’ll consider keeping your digital assets in cold storage.
A cryptocurrency wallet is essentially a digital account for your virtual money, enabling you to receive, send and store your assets with ease. However, there is a difference between keeping your crypto online and offline, especially if you’re concerned about the safety of our coins and tokens.
If you’re interested in moving your crypto into cold storage, here’s how to get started.
What Is Crypto Cold Storage
Cold storage is a term used to describe an offline storage system. An example of a physical medium used for cold storage is a piece of paper or an engraved piece of metal.
When it comes to cryptocurrencies, cold storage is offline storage of the codes - called keys - that allow your assets to be managed.
Since your crypto wallet is offline, it’s almost impossible for it to be hacked or used by an unauthorized party, making it one of the safest ways of storing cryptocurrency.
Besides not being connected to the internet, a cold crypto wallet gives the user a private key, passphrase, password or some other form of encryption protection that becomes the only way of accessing the wallet.
But while there are many advantages in opting for a cold storage strategy, it’s worth bearing in mind that your assets will be harder to trade quickly as you’ll have to go through more steps in accessing your portfolio.
Why Use Crypto Cold Storage
The crypto market has been upended by a series of crashes and the downfall of lenders such as FTX, prompting many in the space to either sell their assets or consider alternative options to keeping their net worth safe.
The fall of FTX, for example, had led to questions over the advantages of using centralized crypto exchanges over decentralized alternatives. While these platforms are no doubt convenient, they are exposed to significant risks such as hacks, data breaches, liquidity issues, bankruptcy, not to mention that users can only access their funds through the exchange. If the platform is somehow compromised, you might never see your money again.
Taking complete ownership over your digital assets, keeping them in a wallet and taking them offline can help mitigate some of those risks.
Hot Storage vs Cold Storage
There are two kinds of crypto wallets users can typically choose from: hot and cold, each offering a different range of features. Cold wallets can be divided into:
Paper Wallets
As the name indicates, a paper wallet is simply a piece of paper where you’ll find your public and private keys printed or even written down. This offline method can be a safe way of storing and managing your crypto since hackers have no way of accessing your wallet keys. That said, losing a paper wallet might result in you losing all your assets since you won’t be able to use your keys.
Hardware Wallets
A hardware wallet is an external physical device where you can store your keys, normally a Bluetooth device or a USB stick. Moreover, transactions can normally be approved only after its user pushes a button on the device, meaning that remote unauthorized third parties would have a hard time trying to get away with your money.
The biggest advantage of cold storage is that you can’t hack a piece of paper or an external device that’s not connected to the internet. On the flipside, cold storage wallets can seem quite impractical since there are quite a few steps involved in accessing your crypto.
A hot wallet, on the other hand, lets you store your keys on a platform or application such as web-based, desktop or mobile wallets, connected to the internet, meaning that your funds are more easily accessible and you can carry out day-to-day transactions with greater ease. Most hot wallets are also free. However, they can leave users open to vulnerabilities that can be targeted by hackers.
Types Of Cold Storage Wallets
There are a number of cold storage wallets currently available, although you should keep in mind that not all options might support every token you have. Here are the top three most popular options:
Ledger
Leger has three cold storage wallets on the market: the Ledger Nano S Plus, which costs $79, a mid-range device Ledger Nano X at $149 and the most recent cold wallet, Ledger Stax which will set you back $279. You can compare them all here.
You will notice that, depending on the model you choose, your device can be connected across different kinds of platforms, with USB or Bluetooth. Ledger supports more than 5000 coins as well as NFTs.
However, despite being one of the most popular cold storage wallets, Ledge was hacked in 2022 but no crypto was stolen at the time.
Trezor
Trezor offers two devices - Trezor Model One ($69.00) and Trezor Model T ($219.00).
A quick comparison will show you that Trezor supports far fewer coins and tokens than Ledger, has no Bluetooth capability and iOS support.
Ellipal
In the past, some concerns have been raised over the possibility of Bluetooth being susceptible to hacks. Ellipal has a series of cold wallets that use other methods, including QR codes, to protect your assets. Ellipal supports 51 Blockchains and over 10,000 tokens.
How To Move Your Cryptocurrency To a Cold Storage Wallet
- Plug your cold storage device into your computer.
- Download and install the software provided with your cold storage wallet.
- Create a wallet for each type of cryptocurrency you have, such as Bitcoin, Ethereum or Dogecoin. Select the blockchain of the cryptocurrency, click "create new wallet", follow all the required instructions and confirm creation on your cold storage device.
- You’ll be given a "standard seed backup" code, which you must keep in a safe and offline location. You will have to enter seed phrase keywords back into your cold storage wallet device to confirm them.
- To access your device, you’ll have to set up a pin.
- Once you have a pin, you’ll be able to add your crypto to your cold storage wallet. Usually, by clicking receive you’ll be able to see your cold storage wallet’s address.
- Go to an exchange or whatever hot wallet location you’ve been using and send your digital to the address attached to your cold storage wallet.
It’s very important that you purchase your cold wallet from a trusted distributor or directly from official manufacturers such as Trezor, Ledger and Ellipal. Otherwise, you are risking ending up with a device that could have been tampered with and set up with passwords designed to defraud users.
Closing Thoughts
When it comes to having a digital wallet and protecting your crypto assets, cold storage is a better option for crypto users with a long-term investment strategy in mind, and those who keep security as a top priority.
There are pros and cons to this approach: cold storage can certainly keep your coins safe, but if you misplace your hardware device with your keys, it will be impossible to recover your money. So it's important that you protect your keys against accidental loss and back them up.
That way, you can simply buy another hardware wallet and access your crypto.
