In the ever-changing world of cryptocurrencies, cold storage does not refer to putting a good idea on hold. Nor does it mean putting one’s fur coats in cold storage for the summer months like people used to do, in the days before they were covered with red paint.
The term refers to moving your bitcoins and altcoins to an offline “wallet” where no one can get their grubby hands on them. This type of digital wallet is not connected to the Internet, so your valuable coins are protected from hackers or other unauthorized thieves.
If the bank holding your “real” money is robbed, your deposits are insured, so you would get all your money back. But there is no central authority for replacing cryptocurrency, so once it’s gone, it’s gone for good.
The problem with buying and selling bitcoin is you have to give out your private “key,” which is a string of numbers and letters that gives someone access to your bitcoin wallet. Whenever there is a buyer and a seller for a transaction, they have to share their unique keys with each other to send and access the funds. When the transaction has been completed, the signed transaction is broadcast online to the network, making it vulnerable to a hacker.
With cold storage, all this takes place offline. The transaction is started online, but is then transferred to an offline wallet kept on a USB, CD, hard drive, or even paper, where it is signed before it is transmitted to the online network. Therefore, the hackers would not be able to access the private key information.
So before you order that pizza using bitcoin, make sure your digital wallet is secure from pickpockets.