In the cryptocurrency sector, cold storage is the act of storing cryptocurrency ID keys somewhere that is inaccessible through the Internet. Cold storage is intended as a means of protecting the ownership of coins from malicious hacking.
An ID Key For Every Cryptocurrency Coin
Cryptocurrencies are a digital form of currency, so there is no way to physically store a unit of them, nor is there a centralized authority that can verify and enforce ownership of them.
Therefore, the only way to determine ownership is to attach a unique ID key to every individual unit of a cryptocurrency. The person who knows the ID key of a particular coin is effectively the owner of that unit of cryptocurrency.
Cryptocurrency ID Keys, Exchanges And Hacking
Cryptocurrency exchanges hold their users’ ID keys for them to facilitate transactions. However, this leaves the hosted ID keys vulnerable to malicious hacking attempts, as well as human error and negligence.
There have been a number of high profile security breaches of major cryptocurrency exchanges that have seen 10s of millions of USD worth of cryptocurrency stolen.
This is why many users store their ID keys for coins offline when they are not actively trading with them.
Cold Storage Options
There are a number of cold storage options available for storing cryptocurrency ID keys offline. The simplest method is to store an actual paper copy of ID keys.
Another popular method is to use a USB drive, though these units are prone to failure. There are now specialized cryptocurrency drives similar to a traditional USB drive, but designed specifically for quickly and securely storing ID keys.
Final Thoughts
Using a cold storage method for cryptocurrency ID keys is essential for any day traders who trade cryptocurrencies. Cryptocurrency exchanges are not immune to security breaches, and there is no regulatory body that will return lost or stolen coins.
Any cryptocurrency coin that is not being used for trading should be stored offline in an effective and secure cold storage system.