As the cryptocurrency market continues to grow, many investors are starting to see opportunities for generating some serious returns on their investments. However, it is important to remember that every investment comes with risks. Thus far in 2018 alone, there have been at least six high-profile cases of hacking where cryptocurrencies were stolen from exchanges (i.e., Bitfinex, Coinrail and Bithumb).
1. Cold storage refers to keeping your digital currency offline (i.e., disconnected from the internet) instead of on a computer connected to the internet. At first glance, this might seem like an impractical way to store your coins because it would be easy for someone with malicious intentions to access them. However, the benefit of using cold storage is that it significantly reduces the amount of risk that your coins will be hacked or compromised by malware.
2. Cold storage options vary in terms of degrees of security and ease of use. On one end of the spectrum, you can store it on a flash drive (encrypted) for easy access whenever you need to convert it back into fiat currency. On the other end of the spectrum, you can store it in a physical piece of paper that only you have access to.
However, this option is extremely impractical because it defeats the purpose of using cryptocurrency; i.e., having fast and easy access to your funds anytime you want.
3. If you plan on storing a significant amount of coins for an extended period of time, the most popular options are hardware wallets and paper/brain wallets. Hardware wallets can be plugged into your computer as a USB drive whenever you want to access your coins.
Paper wallets consist of a public address that has been pre-generated from a wallet that already exists somewhere else. You can also use a brain wallet which is a pass-phrase that you create yourself to generate your public and private keys.
4. In general, it is highly recommended that investors on Bitcoin Era keep at least 75% of their digital currency in cold storage while leaving the remaining 25% for trading on exchanges or day trading from home. This percentage is just a recommendation.
5. Currently, there are two hardware wallets that I recommend for storing your cryptocurrencies: Trezor and Ledger Nano S. They both offer a simple and secure way to store cold storage for most major coins (Bitcoin, Ethereum, etc.).
Keeping Your Cryptocurrency Safe: Cold Storage Tips
1) Use well-known and reputable wallets: It goes without saying that you should only use well-known and reputable wallets.
2) Create a new address for each transaction: If you own multiple cryptocurrencies, it is highly recommended to generate a new receiving address every time you receive funds. This will help protect your privacy by obfuscating the flow of incoming and outgoing funds.
3) Keep your private keys offline: Always keep your private keys offline whenever possible. This will ensure that only you have access to your coins, rather than them being vulnerable to attack via malware or other hacking techniques.
4) Use different wallets for each cryptocurrency: If possible, use different wallets for each of your cryptocurrencies. This will help to minimize risks if a particular wallet is compromised by malware or hackers.
5) Use multiple wallets: If possible, use different wallets for different purposes. For example, use a hardware wallet as a cold storage backup and store your day trading or savings in a paper wallet offline whenever you are not actively using it.
With these few tips, you now know the benefits of using a cold storage wallet and why it should be your first choice.