What is Cold Storage?

Cold storage is a security practice of keeping private keys or crypto wallet information in an offline environment, enhancing protection against online threats like hacking or malware.

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Cold storage, often referred to as “cold wallets,” involves keeping the private keys or wallets offline, away from Internet-connected devices. This strategy significantly reduces the risk of hacking, phishing attacks, and other cyber threats. Cold wallets can take various forms, including hardware wallets, paper wallets, air-gapped computers, and deep cold storage. The overarching principle is to create a physical or digital barrier between the private keys and the online environment, adding a layer of security to cryptocurrency holdings.

When funds are needed for transactions, they can be securely moved to a crypto gateway that connects to the broader blockchain network, facilitating safe and efficient transfers while maintaining the integrity of the assets.

Types of Cold Storage

Hardware Wallets

Hardware wallets are specialized devices designed explicitly for securely storing private keys offline. They usually resemble USB drives and generate and store cryptographic keys in an isolated environment. To authorize transactions, the hardware wallet needs to be physically connected, providing an additional layer of security. Features such as encrypted storage, PIN protection, and backup seed phrases make hardware wallets a popular choice among security-conscious users.

Paper Wallets

The most simple, yet one of the safest methods that involves creating a physical document that contains the private keys and corresponding addresses. This method requires the physical document for transactions. While paper wallets are immune to online hacking, ensuring the physical security of the paper is crucial. Users typically print the document, laminate it, and keep it in a secure location.

Air-Gapped Computers

Air-gapped computers are devices completely isolated from the Internet. These computers generate and store private keys offline, providing a secure environment for cryptocurrency holdings. Transaction signing on air-gapped computers may involve manual steps, and the lack of online connectivity minimizes exposure to external threats. This method is particularly suitable for users seeking the highest level of security through physical isolation from the Internet.

Deep Cold Storage

Deep cold storage takes the concept of cold storage a step further by storing private keys or seed phrases in an offline environment with limited physical or digital access. This can involve storing information in secure vaults, safety deposit boxes, or other highly secure physical locations. Deep cold storage is suitable for long-term storage of significant amounts of cryptocurrency where access is intentionally restricted, providing an added layer of protection against various risks.

 

How Secure is Cold Storage?

Cold storage, with its offline approach, is considered highly secure. Keeping private keys away from the Internet significantly reduces the risk of unauthorized access and online threats. However, even with these advantages, improper handling can put assets at risk.

For example, in February 2025, hackers stole around 401,000 Ethereum from Bybit during a transfer from its cold wallet to a warm wallet. The funds that stayed in cold storage were untouched, showing why most assets should remain offline and only small amounts should be moved when needed.

Besides, the funds can be lost if a cold wallet is used incorrectly:

• Physical threats. Hardware wallets or paper wallets can be lost, stolen, or damaged. If a backup is also compromised, this can result in total loss of funds.
• User error. Misplacing recovery seed phrases or forgetting PINs can permanently lock users out of their wallets, leading to irrecoverable losses.

How to use cold wallets for business

When integrated properly, cold wallets can support both operational needs and long-term security.

Setting up a cold wallet typically includes the following steps:

1. The purchase of a reputable hardware wallet directly from the manufacturer can work well to avoid tampering.
2. Initialization of the device, following instructions to generate private keys and set a strong PIN.
3. Creation of a recovery seed phrase on paper or metal to store it in a secure location separate from the device.
4. A small test transfer of cryptocurrency is to be completed before moving larger sums.

What businesses should know:

• A balance between hot and cold wallets is important. It’s better to maintain a small portion of funds in hot wallets (e.g., 5%) for daily operations, while keeping the majority (e.g., 95%) in cold storage.
• Cold wallets can act as reserves or store low-liquidity assets, while hot wallets manage active transactions. This approach protects against external attacks and ensures smooth business operations.

Conclusion: why cold storage matters in crypto security

Cold storage is designed to keep cryptocurrency private keys offline, reducing exposure to hacking, phishing, and malware.

It can take the form of a hardware wallet, paper backup, or secure vault.

Using cold storage helps individuals and organizations maintain control over their assets and manage security risks effectively.

The secure storage of funds depends on:

• Proper handling of hardware wallets or paper backups to prevent loss, theft, or damage.
• Safe storage of recovery seed phrases or PINs in locations separate from the device.
• Following the tested procedures when transferring funds, including using small test amounts first.
• A clear balance between cold and hot wallets for operational needs, ensuring most assets remain offline.

Following these practices can help reduce risks and maintain the security of crypto assets, though they don’t guarantee complete safety.