Cold Storage: What is it and why is it important?

The cryptocurrency market can be extremely volatile at times, and this can intimidate new investors. As a result the terms ‘cold wallet’, ‘hardware wallet’ and ‘cold storage’ may appear in conversations regularly. But when someone online says ‘not your keys, not your crypto’ what do they actually mean? In this article we will briefly cover hardware wallets. What they are, how they work, and why they are important.

How does it work?

To keep your cryptocurrency assets safe and secure, hardware wallets, also referred to as cold wallets, are available. In theory, this makes sense, but how does it actually work? To begin with, a hardware wallet is typically a physical product, software, or service. These hardware wallets enable users to send cryptocurrency to them and store it offline, keeping them cut off from the larger network. Contrary to popular assumption, you do not physically transfer your coins and tokens to the wallet, which is then turned off. This is because the coins themselves are dependent on the network and cannot exist independently. Your private key is instead stored in the hardware wallet. This private key is required to access an address on the blockchain. If your private key is kept secure, in an offline hardware wallet, behind a pin code, there is very little other than forgetfulness that can get between you and your coins.

Extra Security

There are multiple hardware wallet providers, and some have more security features then others however, these are the most common. The ability to set a PIN code that is required to access the wallet once it is connected to the PC. All require you to set a seed phrase, perhaps the most important part of setting up a hardware wallet. Normally they have a minimum of 12 words, and this phrase can be used to reset the private key associated with the hardware wallet. This allows for multiple things, such as moving your funds from one hardware wallet to another. Having a secure seed phrase, and a pin code ensure that your keys, and by extension your coins are as secure as possible.

The seed phrase also works as a backstop for possible human error. We are all human, and as a result we all make mistakes. If you lose your hardware wallet, but you still have your seed phrase, you can safely buy a new hardware wallet, reset your private key via the seed phrase, and send your coins to the new device.

Being responsible with your assets

By electing to send your funds to a hardware wallet, you are taking full control of your assets. This is both a positive thing and a negative. This is because taking responsibility for your own assets means any mistakes made fall on you. There is no technical support or anyone you are able to email if the seed phrase is recorded incorrectly or the device is misplaced. In contrast, having your coins in a hot wallet, which is another term for a wallet connected to the internet, means you are also able to take advantage of that online service. This includes things such as a helpful support team, FAQ articles, and even phone calls. With a hardware wallet, there is no support or crutches, all of the responsibility falls on the individual. As such, hardware wallets are only recommended for those who know what they are doing and are able to navigate the industry. For other security recommendations that can be implemented on top of a hardware wallet you can read more here.

Hardware wallets are always a topic of conversation in the cryptocurrency industry, the extreme security and peace of mind they provide is a big reason why. If an individual has their coins on a hardware wallet with their seed phrase secured, they will be able to sleep soundly knowing they will not need to worry about internal exchange issues, or extreme market conditions. However this also comes with its own drawbacks. Being fully responsible for private keys means that the buck stops with the owner. If the device is lost, or the seed phrase goes unrecorded or forgotten, then the coins will be lost. If the device is lost, but the seed phrase is remembered, then a new hardware wallet can be purchased and the coins can be transferred. Security should be at the forefront of your mind when buying and selling cryptocurrency. At CoinSpot security is always at the forefront of everything we do. If you are interested in how CoinSpot keeps accounts secure, or you would like more information about proper security you can read more here.