How Do You Store Your Cryptocurrency?

May 24, 2018

Cryptocurrency Storage Overview

Once an investor purchases their cryptocurrency of choice on an exchange, what are they supposed to do after to secure their cryptocurrency? The investor should decide which method of storage he/she prefers: cold storage or hot storage.

  • Cold storage refers to storing a cryptocurrency on a cryptocurrency wallet that is not connected to the internet

  • Hot storage refers to using a cryptocurrency wallet that is connected to the internet or a software program used on the computer – typically free of charge

Why Does an Investor Need to Use Cold or Hot Storage?

Because cryptocurrencies are digital assets and cannot be stored physically, the underlying investment is at risk of loss in the digital space at any given point. The cryptocurrency exchange on which the investor purchased the cryptocurrency can be hacked, the investor’s account can be hacked, or the exchange can go out of business to name a few examples. Notably, Mt. Gox, the cryptocurrency exchange that was responsible for 70% of all Bitcoin (BTC) transactions worldwide reported that 850,000 Bitcoins (BTC) were stolen in 2013. As a result, investors who did not store their Bitcoin’s (BTC) in cold or hot storage lost their investment indefinitely. If this theft were to be repeated today, ~USD$6.5bn worth of investments would be at loss.

Breaking Down Cold Storage

Cold storage is a way to take the private key address associated with your cryptocurrency investment and store it on a physical wallet. The storage contains the private key address and can be accessed in a variety of forms:

  • Paper storage: a piece of paper with your private and public key printed or written on it

  • Hardware Wallets: an electronic device which signs transactions through the private keys stored offline. A hardware wallet allows an investor to recover funds through a backup seed key if the device is damaged or misplaced

  • USB Drive: a USB can be used as a cold storage wallet by putting a file with the private & public keys associated with your cryptocurrency investment

  • Desktop Wallets: an application that can export the files of a private key in an offline environment. Note, the private keys are stored offline on the machine but to receive or send funds through the wallet requires an online connection

Breaking Down Hot Storage

  • Desktop Wallet: a desktop wallet can also be hot storage if it needs to connect with the internet or a cloud service to retrieve cryptocurrency storage data

  • Application storage: applications like the Coinbase trading application or Gemini exchange, which serves as a custodian, is an example of hot storage investors can use for their cryptocurrency investments

  • Exchange storage: investor’s may leave their cryptocurrency investment on the exchange with the address which the exchange generates. This version of storage is the most vulnerable.

Choosing the method of storage is a critical step in acquiring cryptocurrencies. The method of storage should fit investors’ use case & investment objectives. Whatever method of storage is selected, prudence must be a dominant consideration

Sources:

https://en.wikipedia.org/wiki/Mt._Gox

https://coinsutra.com/cold-storage-cryptocurrency/