Cold storage is a place to store digital assets offline. This is done for security reasons, especially to store large amounts of digital assets. The implementation of cold storage is usually done through paper wallets and hardware wallets.
Cold Storage solves the problem by signing transactions with private keys in an offline environment. This method should not have the ability to communicate with other electronic devices unless physically plugged into those devices when you access your keys.
Every transaction initiated online is temporarily transferred to an offline wallet stored on a device such as a USB, CD, hard drive, paper, or offline computer, which is then digitally signed before being sent to the online network. Since the private key does not come into contact with the online connected server during the signing process, even if online hackers discover the transaction, they will not be able to access the private key used for it. In exchange for this added security, the process of transferring to and from cold storage devices is somewhat more burdensome than the process for hot wallets.
For example, if a crypto investor has tokens in a hardware wallet (see below for additional information), the crypto transaction to receive a new token might look like this:
- Investors connect hardware wallets to internet-enabled computers.
- The investor chooses the option to receive tokens. The device generates addresses to facilitate transactions.
- The sender initiates the token transfer to the address created above.
- The investor decides on the hardware wallet, which contains the public and private keys, and the information remains offline.
There are many ways to store crypto assets. Apart from Cold storage, one of the other most popular methods is known as Hot storage.