Storing crypto on virtual exchanges has some inherent security risks that have been exploited by hackers and cyber criminals. This article will touch upon this important topic and provide you with alternative methods in which to store your digital assets.
Cold and Hot Wallets
The main thing in cryptocurrency storage is the private key and who has access to it.
Cold storage wallets operate offline and without a constant internet connection. If your key is not on the Internet, then it is much more difficult to steal.
A hot storage wallet is a wallet with constant connection to the Internet.
So, all storage options can be distinguished by the following criteria:
- private keys are kept by you or by third parties.
- without internet connection or with internet connection
A cold storage wallet with a private key is considered the most reliable storage option. Such a wallet is suitable for long-term storage of large amounts. However, it is not convenient if, for example, you do trading and need access to your wallet for transferring small amounts.
hardware wallets like Ledger, Trezor, Pi Wallet, Keepkey, Opendime, Bitlox, etc. have a flash drive within the software without an internet connection. You can connect to the Internet only when sending a transaction. You need to confirm the transaction physically, from the device itself. This is a “cold” method of storage without an internet connection (connection only at the time of the transaction). The user keeps private keys.
This method of storage will be also convenient for you if you want to conserve your funds for an extended period. In offline mode, you can generate a public and private key. For example, if you are using the service walletgenerator.net it will transfer those keys in the form of a QR-code, which can be printed and stored by you.
Physical Bitcoin Wallet
A physical bitcoin wallet has almost the same properties as a paper wallet. Encrypted bitcoins cannot be spent until the seal protecting the secret key has been broken. However, the security of the seal is not considered very reliable.
Desktop Offline Wallets.
There are also two main types of offline wallets:
- Wallets, where the user is the only one with the access to private keys. You can install such wallets on a personal computer as a separate program. As a rule, these are the wallets from the developers of that cryptocurrency. For example, Bitcoin Core. Litecoin Core, Mist, etc. Such wallets are also called “heavy” wallets since during installation they take up quite a lot of space (for example, you will have to free up at least 200 GB for a Bitcoin wallet in 2018). When installing such wallets on laptops flash drives that are disconnected from the Internet can also be called “cold” wallets. In general, they are also considered safe.
- The so-called “light” offline wallets. These are desktop wallets that allow you to store cryptocurrency without downloading its full registry to a bunch of gigabytes. Some of them give you private keys and the ability to restore a lost wallet at any time using seed phrases. There is a drawback – they do not always contain the full version of the blockchain, and sometimes won’t show up-to-date transaction information. Examples of such a wallet are Electrum and Armory.
Light wallets can be multi-currency, with a built-in internal exchange for example Exodus. Its private keys can also be restored using seed-phrases. However, inside such wallets, not only you but also developers have access to your private keys.
It is also worth to mention an essential aspect of light wallets, which are open source code. If something happens to the wallet, then it will be only possible to restore the wallet using the seed phrase only if the function is restored.
As a conclusion on cold wallets, I can say that their main advantage is reliability and security, and the main drawback is that it is difficult to move cryptocurrencies quickly. Therefore, cold wallets are suitable for long-term storage. For everyday transactions, hot wallets are the best. The exceptions are some hardware wallets that are compatible with online cryptocurrency storage and exchange services.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
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