Cold storage of cryptocurrencies simply means to keep them offline and outside the cloud. Cold storage solutions provide a place that is unconnected to the cloud to house your altcoins.
Three kinds of cold wallets or cold-storage solutions for altcoins are widely used today hardware wallets, desktop wallets, and old-fashioned USB drives. There is another option; paper wallets, that is sometimes called a “cold storage solution,” but is not actually offline.
You should research cold-storage carefully because not all of these solutions are safe, secure, or reliable. If you want to keep your money safe you will have to carefully evaluate all of these options.
Cryptocurrency Hardware Wallets
The best cold-storage option is a cryptocurrency hardware wallet. A hardware wallet is a device similar to a USB drive that requires a personal identification number (PIN) code to access it.
The big advantage to hardware wallets is that you can store altcoins offline and restrict access to them. The hardware wallet is only vulnerable to cyberattacks when you connect it to a computer or a smartphone. The hardware wallet manufacturers like Ledger claim their devices are malware-proof, but that should be viewed with skepticism.
The good news is that cryptocurrency hardware wallets are getting more secure and elaborate all the time. The bad news is that a top of the line cryptocurrency hardware device such as the TREZOR or the Ledger Nano S will cost you $100 to $200.
There is also a new generation of hardware wallets planned that will have far greater capabilities. Ledger’s Blue which is scheduled to go on sale on October 31, is designed to look and function like a tablet and offer Wi-Fi connectivity. That means you will be able to manage your currency on the wallet itself.
Advantages to Cryptocurrency Hardware Wallets
- Very secure. The device is offline and requires PIN access.
- Most wallets are small and easy to carry with you or hide.
- Provides real offline cold storage.
- Some wallets like the TREZOR are rugged enough to survive water damage and getting dropped.
- There have been no reported thefts from hardware wallets.
Disadvantages to Hardware Wallets
- Current models can be hard to use because of small screens and size.
- They can be expensive.
- Hardware wallets can be hard to find. Ledger’s popular products are often sold out on Amazon.
- May only provide storage for popular currencies such as Ethereum, Bitcoin, and DASH. Check the manufacturers’ websites to see what stores what.
- It can be a real hassle to recover your coins if the wallet is lost, stolen, destroyed, damaged or malfunctions. There’s a complicated process involving keys and contacting the manufacturer.
- There are only a few manufacturers. Currently, only three companies make them. Only one, Ledger sells more than one model of wallet.
A desktop wallet is a simply a storage app for cryptocurrency that you install on your laptop, tablet, or desktop computer.
The big advantage to desktop wallets is ease of use, the interface will be large enough for a human being to see and use unlike the tiny screen on a hardware wallet. You will also be able to use a keyboard and a mouse which will make it easier and faster to use.
The disadvantage to a desktop wallet is obvious; if you use the internet on your computer you will expose the currency in your wallet to theft and malware. The only way to keep currency in a desktop wallet totally secure is not to go online – which would probably make your computer useless.
A desktop wallet can be a useful tool but it is not a very secure storage solution. Another danger is that if somebody steals or sits down at your computer they might be able to get into your wallet and get your coins.
There are several popular desktop wallets available today including Electrum; which provides two-factor identification. That means there are two levels of security. Electrum also interfaces with Ledger, KeepKey, and TREZOR hardware wallets.
The biggest advantage to wallets like Electrum, Exodus, Bitcoin Core, and Armory is that most of them are free.
The most popular cold-storage solution for cryptocurrency around is still the plain-old USB drive and it is easy to see why.
USB drives are cheap, they are sometimes given away free as a promotion by merchandizers, easy to get and easy to use. They stick into most computers and they are small and easy to hide or carry around in your pocket. Like hardware drives, USB drives are safe from malware and hacking as long as they are not plugged into a device with internet access.
The problem with USB drives is that there are no added layers of encryption or restricted access. Anybody that gets his hands on the USB drive can plug it into his computer and take your coins. A USB drive can be hacked or infected with malware if it is plugged into an internet connected device.
An even greater drawback to USB drives is that there is no recovery of lost or stolen altcoins from one. The hardware and desktop wallet providers will give you a “key” – a code that can allow you to recover cryptocurrency. If you have the code you can get your money back even if the hardware wallet is completely destroyed.
A USB drive should only be used for cold storage if no other option is available. The extra money you spend on a hardware wallet will be well worth it, because of the added layers of security and the possibility of recovery of lost coins.
Paper Wallets are Not Cold Storage
Many of the online cryptocurrency gurus like to claim that there is another cold storage option they call a “paper wallet.” This is not true because the currency is actually stored in a digital account online.
Instead, the “wallet” consists of a piece of paper with a code or a quick read (QR) code printed on it. To access the altcoins you will have to scan the QR code or enter the code online. This obviously is not cold storage because it is online.
The best cold storage option for most cryptocurrency users will be a combination of a desktop and a hardware wallet. Keep those coins you plan to spend in an online or desktop wallet, and everything else in the hardware wallet. That way most of your investment will be safe.