3 reasons why crypto cold storage makes sense during a long crypto winter

For serious crypto investors, risk management is a primary concern. Once you’ve accumulated a certain level of crypto wealth, you don’t want to lose it to hackers, scammers or cybercriminals. As a result, a popular risk management technique is cold storage, which is a way to store your cryptocurrency offline and away from bad actors on the internet.

Cold storage in crypto can take various forms. For billionaire investors, cold storage can mean armed guards, hardened underground bunkers and giant bank vaults. For retail investors, cold storage typically involves a physical device similar to a USB stick that you can buy online for less than $150. For billionaire investors and retail investors alike, there are three main reasons to consider crypto cold storage.

Currency risk for cryptocurrency

Over the past six months, the perceived risk of storing crypto on cryptocurrency exchanges has increased significantly. After all, there have been a number of high-profile bankruptcies and insolvencies in the crypto world during the current “crypto winter.” At the same time, there is persistent speculation about the potential bankruptcy risk of popular cryptocurrency exchanges. In cases like Voyager or Celsius, investors lost access to their crypto holdings for an unspecified period as soon as financial distress was announced. At a certain point, people began to question whether these crypto holdings could be permanently frozen or used to pay creditors later. All of this has made some crypto investors nervous.

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Not surprisingly, people are exploring alternatives to storing crypto on an exchange, and cold storage offers a relatively inexpensive solution. Even before the beginning of the crypto winter, some investors had a simple rule of thumb for how much of their crypto to keep on the exchange and how much to keep off the exchange. For example, they may decide to keep 20% of their cryptocurrency on a cryptocurrency exchange, and the rest in cold storage.

Hackers and cybercriminals

Another reason to consider crypto cold storage is the ever-present risk posed by cybercriminals and hackers. To paraphrase infamous bank robber Willie Sutton: Hackers rob cryptocurrency exchanges because that’s where the crypto is. Throughout crypto history, there have been some legendary exploits involving major crypto exchanges. Perhaps the most famous example is Mt. Gox, where hackers broke into the exchange, withdrew $350 million in Bitcoin over a long period of time, and disappeared into thin air. In fact, there is an entire Wikipedia page dedicated to major crypto heists around the world.

Extreme market volatility

The last reason to consider cold storage is to protect your crypto during periods of very high volatility or extreme market uncertainty. For example, when Ethereum flips the switch on Merge, people aren’t 100% sure what’s going to happen next. As a result, some major cryptocurrency exchanges have said they will halt Ethereum withdrawals and deposits on the day of the merger, and potentially even longer. Coinbase Global has also warned users to be aware of scams related to the merger, due to all the confusion about the “old” Ethereum and the “new” Ethereum. And Robin Hood has already notified crypto investors that, out of an abundance of caution, it will halt withdrawals of several other cryptos in addition to Ethereum. If you are concerned about what might happen to your cryptograph, one option would be to move it to cold storage.

Is cold storage for you?

As they say in the crypto world, “Not your keys, not your crypto.” The keys refer to the cryptographic keys that protect your crypto. When you hold your money on a cryptocurrency exchange, the exchange holds your keys for you in a custodial role. But when you use cold storage, you are responsible for your keys. Hackers cannot access these keys because the keys are offline.

However, there is one downside risk here. Since only you own the keys, if you ever lose them, there will be no one to return them to you. The annals of the crypt are filled with examples of people losing hundreds of thousands of dollars in Bitcoin simply because they lost their keys. That’s one of the reasons people store crypto on exchanges – it prevents them from experiencing this unfortunate scenario. And major cryptocurrency exchanges may even offer some form of cold storage to help clients protect themselves from the risks outlined above.

At the end of the day, some form of cold storage makes sense if you have a lot of crypto at stake. It really depends on your risk tolerance and how much crypto you need to access daily. If you plan to HODL (crypto lingo for “hold”) for the long term, cold storage can be a way to protect your Bitcoin during what could end up being a very long crypto winter.