Cold storage is a computer system or mode of operation that is designed for the retention of inactive data, in this case private keys for cryptocurrencies.
This helps put up resilient barriers against theft by hackers and malware, and is often a necessary security protocol especially dealing with large amounts of Bitcoin.
In order to “own” a cryptocurrency, one must be in control of a cryptocurrency’s private keys. As such, private keys are long strings of random characters that can be used to send cryptocoins.
Benefits of Cold Storage
Many cryptocurrency experts recommend that you don’t keep your coins on an exchange at all rather, keeping them in a cold wallet of your own.
Overall, cold storage helps control for a number of threats such as theft.
This includes signing transactions with private keys in an offline environment.
However, transactions initiated online are temporarily transferred to an offline wallet kept on a device such as a USB, CD, hard drive, paper, or offline computer.
This itself creates risks that must be accounted for.
These private keys can be stored in several different ways. By extension, when they are stored inside of a device that is connected to the internet, they are said to be in a hot wallet.
When they are stored in a device (i.e. a hardware wallet) that is not connected to the internet, or on a piece of paper (a paper wallet), they are said to be in cold storage.
Because cryptocurrencies that are kept in cold storage do not have an active connection with the internet, cold storage is considered to be a much safer method of keeping coins secure.
After all, you can’t hack into a piece of paper.
When searching for a cryptocurrency exchange, it is imperative to make sure that the exchanges you use keep their cryptocurrencies in cold storage.
This vastly reduces the risk of losing the funds that you keep on an exchange to a hacker.