How Does Cryptocurrency Cold Storage Work?
How does cryptocurrency cold storage work? The key to understanding this is remembering that digital currency has no government backing or protections. American consumers who place their money in a checking or savings account have a certain set of guarantees under the Federal Deposit Insurance Corporation, which insures such accounts up to a specific limit. But Bitcoin, Ethereum, and other digital currencies have no such protections and are viewed officially by the IRS as property rather than currency.
So cryptocurrency users have to find an alternative to protect themselves against theft, fraud, and other problems that can deprive them of their Bitcoin earnings.
If you’ve never used digital currency before, the first thing you learn is that you’ll need a digital wallet to store your digital money in. Protecting your Bitcoins using cryptocurrency cold storage relies on similar technology, but in this case, the wallet is offline, with your bitcoins stored on a platform not connected to the internet.
Why would you want to do this? One important reason for doing so is the fact that hackers can gain access to online digital wallets even with anti-theft measures in place. Cryptocurrency cold storage deprives a potential hacker of access to your digital belongings entirely save for physical theft of the physical keys or drives.
Your bitcoin wallet is “yours” because you possess both public keys and private keys — the private key is subject to hacking if stored online, in a process that experts call network-based theft.
How Cryptocurrency Cold Storage Works
Cryptocurrency cold storage prevents network-based theft by storing your private keys offline on a mobile device including USB drives, an air-gapped computer (one that is never placed on the network) intended to remain unconnected to the internet, portable, or hardwired hard drives. You
can even write your private keys on paper and store them in a safe or secured drawer (not that writing them on paper is practical or an efficient way to do business).
When using the “on paper” version of cold storage, it’s best to use a QR code so you can easily scan the code and use your bitcoins or altcoins in a less cumbersome way. But keep in mind that if your “analog” private key is damaged — the paper becomes stained, torn, lost, etc. — you may
lose your private key unless you’ve made a backup copy.
There are other forms of crypto cold storage you can try. Such as using a hardware crypto wallet, smartcard, or another tech to create offline private keys. Using any physical media in this manner requires similar care to the paper key option mentioned above — if your physical drive or device is
lost, damaged, or destroyed, you risk losing your digital currency.
There is also a hybrid software digital wallet that splits private key storage and public key storage into online and offline platforms respectively. The offline version never connects to the internet when this process is used and provides an extra layer of protection in spite of functioning both on and offline.