Cold Storage Definition

What Is Cold Storage?

Cold storage is where cryptocurrencies are stored in a wallet that is not connected to the
internet.

The purpose of a wallet not connected to the internet is to provide safety from hacks, theft and
any other unauthorized access and vulnerabilities. Because hacks primarily occur through the
internet, cold storage protects from any susceptibilities that are caused from being internet
connected. Wallets connected to the internet are called hot wallets.

When dealing in fiat currencies, due to their centralized nature, any theft from a bank account
can be returned to the original owner. This is not true when dealing in cryptocurrencies. A stolen
crypto is a lost crypto. Forever. That’s why finding a way to protect your digital assets are so
important, and why many turn to cold storage.

Crypto wallets store a user’s private key. This key is the central component to sending or
receiving funds, and acts like an account number. In order to send a cryptocurrency to another
party, both parties must supply their private key. As the payment is sent, the blockchain uses the
private keys to determine if those accounts actually have the necessary funds for the
transaction. Then, once the transaction is complete, users will again need their private keys to
access and use their newly transferred cryptocurrency.

The Benefits of Cold Storage

Using cold storage helps prevent theft by signing the transaction offline. When a transaction is
initiated, it is moved temporarily to a cold wallet, like a USB stick. The transaction is then
digitally signed before it’s moved back online. The result is that the private key never comes in
contact with an online connected server when the key is signed. Therefore even if someone
were to hack a server and find the transaction, they wouldn’t have any access to the private key.

Paper wallets are a common form of cold storage. These wallets are simply a piece of paper,
printed through an offline printer, that contain the private and public keys. They often contain QR
codes which can easily be scanned. The downside a paper wallet is that if it is destroyed or lost,
the keys can’t be retrieved again.