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November 11, 2022

How Does Crypto Cold Storage Work For Crypto Wallets?

How Does Crypto Cold Storage Work For Crypto Wallets?

As an industry, crypto is known for hacks, scams, and losses. Unfortunately, in a tech-driven industry that is highly unregulated, you’re going to face new challenges, particularly those of a malicious nature. However, investing time in learning about keeping your crypto portfolio secure is a great way to protect your assets.

The most effective way to defend against malicious attacks or an honest mistake like losing your access keys is to discover the best way of storing your crypto. You may or may not know there are two main categories of crypto storage, hot storage and crypto cold storage.

In this article, we’ll introduce you to the concept of a cold crypto storage wallet. This is known as the most secure way of storing crypto. Both big-time investors and new traders opt for cold storage.

So, what is it, and how does crypto cold storage work?

Crypto Cold Storage vs. Hot Storage

The most commonly used method of crypto storage is hot storage. A hot wallet is an online wallet. When you first sign up for a crypto exchange or major digital wallet platform, this is a hot wallet.

On the other hand, a crypto cold storage wallet is kept offline. Examples of this include on a USB drive, CD, or in some cases paper.

As you’d imagine, as a hot wallet is always online, it is more susceptible to being penetrated by hackers. In addition, a cold wallet is only ever online for a short period of time. Thus, reducing the opportunity and ability of a hacker to break in.

What Is A Cold Crypto Hardware Wallet?

A crypto hardware wallet is a form of digital wallet that is stored offline, not connected to the internet. The main advantage of using a hardware wallet is its defense against malicious attacks, hacks, unauthorized access, and other vulnerabilities faced by online wallets.

Individual traders and large corporations all make use of cold storage due to its added security and to protect their portfolios. Often, investors will adopt both hot and cold storage methods, keeping the vast majority of their crypto offline while having an online wallet for day-to-day trading, buying, and selling.

How Does Cold Storage Work?

To access a crypto wallet you need the private keys. When the private keys are stored online, it makes unauthorized access more likely. Opting for crypto cold storage overcomes this by authorizing transactions while private keys are offline. The only time a cold wallet interacts with any other online device is when it is physically plugged into a PC or mobile device connected to the internet.

For a transaction to take place, the cold crypto wallet must be plugged into an internet-enabled device, where it will generate a new wallet address. Once initiated, the transaction is transferred to the offline wallet, where it is signed and then sent back to the online network once reconnected.

This method ensures that private keys are never in contact with the internet.

Step 1: Connect the hardware wallet to a device that is internet-enabled.

Step 2: Generate a wallet address by choosing the option to receive tokens.

Step 3: The sender initiates a transaction by sending crypto to the address generated above.

Step 4: Disconnect the cold wallet from the internet-enabled device.

Following this process will see your crypto wallet only being online whenever a transaction is taking place, maintain the privacy of private keys, and drastically reduce the opportunity for a hack to take place.

The only worry a cold storage user has is potentially losing the device or paper their wallet is stored on. However, some measures can be put in place to recover this.

What Happens If I Lose My Crypto Cold Storage Wallet?

Luckily, it’s not the end of the world if you lose or break your hardware wallet. As long as you’ve taken steps to ensure you have a recovery method.

Usually, when initially setting up your cold wallet account, you’ll go through the process of generating a recovery phrase. According to all major hardware wallet manufacturers, it’s more important to keep your recovery phrase safe than it is the device itself – much like your private keys.

So, we recommend keeping multiple copies of your recovery phrase in safe places. You’re clearly concerned about the safety of your crypto, so don’t keep your recovery phrase online or on any internet-enabled device.

A few options include a personal safe, a bank's safety deposit box, or a storage unit. The reason for keeping multiple copies in various locations is to protect yourself against loss, such as a house fire, moving property, or simply forgetting where you put it.

In Summary

If you can’t afford to lose your crypto portfolio, you should be using cold storage. Unlike a traditional bank account, if you have your cryptocurrency stolen you have zero protection and no chance of it being returned. When you use a cold storage wallet, you negate the chances of hacking and retain 100% control over your digital assets.

Check out Escrypto and our range of crypto storage options. Whether you’re looking for hot, cold, or warm storage our wallets use institutional-grade technology at a retail-friendly price, giving all investors the confidence they need to adopt crypto.

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