The storage of cryptocurrency asset is a hot topic in the cryptosphere, hot as it may seem, a lot of people do not know the nitty-gritty of the subject matter. Developers in the cryptosphere are constantly rising to beat the challenges of data security, cyber-attack and other such malicious acts that can lead to the loss of assets. While many feel that the highly encrypted nature of the cryptosphere coupled with the anonymity of transaction would help in securing their wallets, it should be well understood that hackers are always looking for ways to take advantage of loopholes. A deep understanding of the various ways in which cryptocurrency assets are kept or stored is essential in choosing which method works best, this article will explore these options and specifically for cold wallet storages.
Understanding the Concept of Hot and Cold Wallets
Hot Wallets: Hot wallets refer to any cryptocurrency wallet that is connected to the internet. Hot wallets are wallets associated with all centralized and decentralized cryptocurrency exchanges, cryptocurrency’s wallet address and ERC-20 wallets such as IMToken, MyEtherWallet etc. Hot wallets are relatively easier to set up, it entails opening an account with the particular website and after registration, a wallet would be assigned to you. Hot wallets in addition to their easy setup also allow for more coin storage. Hot wallets are generally free of charge.
Cold Wallets: These refer to any cryptocurrency wallet that is not connected to the internet. Unlike hot wallets, cold wallets have limitations in supporting many coins. Cold storage usually entails the purchasing of a hardware device which may cost tens of dollars. Examples of cold wallet hardware include:
- Trezor Ledger
- Nano S Ledger
- Ledger Blue etc.
The Need for a Cold wallet
Active investors in cryptosphere or those who have been following events in the space would understand that coins in hot wallets are relatively not safe. The dangers of leaving coins stored in hot wallets include but limited to:
- Hacking: Since hot wallets are internet dependent, they remain a point of target for hackers. The industry has recorded cases whereby major exchanges were hacked thus leading to the loss of thousands of coins. Notable examples include Mt.Gox hack of 2011 in which 2609 BTC were transferred to a wallet unrecognized by the exchange, Poloniex also lost about 12.3% of all its Bitcoin in 2014 to hackers. Over time, cryptocurrency exchange hack has surpassed $1.3 Billion with about 60% occurring in 2018 alone
- Unfavourable Regulations: Many country’s governments are not in favour of cryptocurrency and its notable financial revolution bid and as such, they pass unfavourable regulations. Any of these regulations can adversely affect an exchange or a platform in which hot wallets are.
- Technical Deficiencies: Any exchange or website with hot wallets can suffer any technical or unforeseen vulnerability that can make cryptocurrency assets stored in hot wallets insecure.
These highlighted reasons have necessitated the development of hardware with cold wallets to help mitigate these negative sides of hot wallets. The storage of coins in cold wallets is particularly recommended for:
- Large cryptocurrency holders
- Investors buying crypto for long term storage
The question of focus for this article is whether offline cold wallets are as secure as they are projected to be. While cold wallet makes up for the deficiencies of hot wallets, cold wallets themselves have worrisome security threats including:
- Hardware virus invasion
- The cold wallets can fall into the wrong hands
- Hassle in keeping the cold wallets safe
These threats if not properly factored in can lead to a more devastating loss than what hot wallets may present.
The safety of crypto assets remains a reference point when discussing the security infrastructure currently in place in the industry. The two ways of storing coins are through the internet-based hot wallets or the offline cold wallets. The two no matter their inherent pros possesses some cons that should be watched out for. Cold wallets, however are gaining huge publicity because the question of the wallet’s safety is solely in control of the owner and this reduces to a very large extent, the risk associated with hot storages that are out of the control of the owner. It is on this premise that we can safely say that cold wallets are secure especially in keeping highly valuable cryptocurrency assets