Cold storage, also known as offline storage, is the best way to protect your cryptocurrency assets.
Cold storage means storing your cryptocurrency keys offline.
Bitcoin purists insist on cold storage. This is because storing keys online increases the attack surface of an investment.
An attack surface is increased when a third party is used (such as an Internet service provider, computer or an online exchange), because it introduces vulnerabilities to the security of cryptocurrency holdings.
As such, as a form of risk management and security, cryptocurrency exchanges (online businesses that provide a platform for trading Bitcoin, Litecoin, Ether, Bitcoin Cash and other cryptocurrencies), which ironically act as trusted third parties for cryptocurrency investors, will store the majority of customer holdings offline, i.e. not present on a web-server or other computer connected to the web.
For example, Coinbase, the most popular cryptocurrency exchange in the U.S., uses cold storage for ninety eight percent (98%) of its customers’ funds.
Only two percent (2%) of Coinbase’s customer account holdings are stored online on Coinbase servers. The two percent of holdings that are held online are used to fund customer withdrawals, etc.
These funds are insured.
When it comes to offline storage, there are four common approaches, or best practices, for storing cryptocurrencies:
- USB drive
- Paper wallet
- Physical Bitcoin
- Hardware wallet
However, each of the above methods has issues in that anyone who can access (physically view) the addresses/keys of the crypto-assets could steal them.
To address the potential risk of others gaining access to these assets in the offline world, IRL, Coinbase utilizes a strategy for cold storage, or offline storage, called “deep cold storage“.
What is Deep Cold Storage?
Deep cold storage involves not only disconnecting the assets from the Internet entirely, but also splitting the data, encrypting it (using AES-256 encryption) and copying the data to USB drives and paper backups.
Assets are then distributed geographically and stored in cold storage in safe deposit boxes and vaults around the world.