Jumped into buying without knowing how to secure your cryptocurrency properly? You’re not alone. Dive into our guide to decode the importance of wallets, sidestep common pitfalls, and the 5 key principles of mastering cold storage.
Contents
What Is Cold Storage?
To master cold storage, knowing the difference between ‘hot’ and ‘cold’ wallets is essential.
Hot wallets are wallets connected to the internet. It generates its recovery phase online and can be accessed on your browser or mobile phone.
Examples: MetaMask, Phantom and Coinbase Wallet
Cold wallets are offline, where the recovery phrase is generated inside a hardware wallet. You access it only on rare occasions and use it sparingly.
Examples: Ledger or Trezor hardware wallets
It is best practice to store large amounts of cryptocurrency in cold storage, not connected to the internet.
Common Mistakes
We have a strong member base who share their experiences. Over the years, we have identified a few common mistakes people make regarding cold storage.
- ❌ Using cold wallets in the wrong ways. Often, it’s misused and connected to many different decentralised applications.
- 🦺 Not stored correctly. Often, people forget the secret recovery phrase, write it down incorrectly or do not store it securely.
- 🤫 Sharing their cold storage plan or seedphrase. Remember, your seed phrase or cold storage plan is only for you and your trusted family.
- 🔃 Funds in cold storage are not segregated and accessed too often. Ensure your cold storage funds are only reserved for long-term holding.
- 🔙 No backup. You’d be surprised at how many users never back up their wallets!
5 Steps To Master Cold Storage
Now we know a little more about cold storage and some common mistakes, let’s go over Collective Shift’s top 5 basics to master cold storage. 👇
1. Get a Hardware Wallet
The number one tip we can give you is a hardware wallet.
They don’t cost much, especially considering how much value they help protect.
We’ve got a specific resource that explains:
- how to choose the right hardware wallet for you; and
- the importance of checking the device is authentic.
Read: Store Cryptocurrency In Crypto Hardware Wallets
2. Think About How You Store Your Cold Wallet
Keep your cold wallet offline, never share it with anyone, and ensure the storage location is physically safe.
Storing your cold wallet safely is just as important as setting it up correctly.
When storing your cold wallet securely, think about the following:
- Keeping it out of view—out of sight, out of mind.
- Make sure it’s fire & waterproof; popular options include home safes or safety deposit boxes.
3. Limit Connecting Your Cold Storage To Dapps
As a general rule, limit connecting any long-term illiquid cryptocurrency on hardware wallets to decentralised applications (dapps).
For most, it’s best to avoid connecting to external sites and only do so for the most trusted (e.g. MetaMask).
To add an extra level of security, many maintain a separate hardware wallet for voting on governance proposals or staking ETH.
4. Back Up & Do A Trial Run!
A backup and a trial run are essential in adding an extra layer of security. The peace of mind it gives is incredible.
Nothing is more heart-wrenching than losing and restoring your wallet’s access, only to find out your PIN is wrong or your recovery phrase isn’t working.
That moment of panic is crazy, trust us. We’ve seen it.
We suggest a trial run with an extra hardware wallet when setting up your device to ensure your recovery phrase is correct and any issues are found before it’s too late.
We’d hate for you to end up like the poor souls who have lost or been locked out of their cryptocurrency!
5. Segregate & Keep Most In Cold Storage
Lastly, ensure you keep most of your cryptocurrency, which should be your long-term holdings, in cold storage.
This is 90% for some, but there is no fixed number. It is any significant majority you would be devasted to lose.
Users often keep too much cryptocurrency connected to hot wallets or on exchanges and not enough in cold storage.
The 1/10/90 rule
Think of your cryptocurrency like your regular money or bank accounts.
Everyday Wallet: <1% should ever be carried in your physical wallet, whether this is cash or cards without a limit.
- Crypto example: Your hot wallet you carry around on your mobile.
Moveable: <10% should be ever accessible or readily moveable.
- Crypto example: Your more complicated web wallet (such as MetaMask) for more frequent and larger onchain activity.
Long-term: >90% should be locked for the long term.
- Crypto example: Your hardware wallet you keep offline and a majority of your non-urgent or non-moveable crypto stack.
Special Shoutout—Prepare A Will
The final but often overlooked step is to secure your cryptocurrency if something happens to you.
Creating a legally binding will outlining your cold storage location, pins, passwords, and recovery phrases will ensure your loved ones can access your cryptocurrency.
For more, see this explainer!
Conclusion
We highlighted quite a few tips and tricks for mastering cold storage.
Remember, you are only as secure as you want to be. Get a hardware wallet, practise your security, and follow our 5 tips to keep you out of trouble.
Further Resources
As you can tell, we take security and storage very seriously.
For more resources, check out the below links!
