Cold storage in the context of cryptocurrency refers to keeping a reserve of your coins offline. This is often a necessary security precaution, especially dealing with large amounts of cryptocurrency.
Methods of cold storage include:
– On a USB drive or other data storage medium in a safe place (e.g. safe deposit box, safe)
– Write it on a piece of paper (or print QR code on paper)
– On a bearer item such as a physical bitcoin.
– Use an offline Bitcoin Hardware wallet
Such a secure means of storing cryptocurrencies is necessary to protect them from hackers. If a hacker gains access to your cryptocurrencies, there is no way to retrieve them, or claim a charge-back as you would with a bank or credit card account. They would be gone forever. This means keeping them offline is your best safeguard from theft.
Cold storage also prevents theft of private keys when broadcasting a transaction because any digital signing is done offline. This means the private keys, that part necessary to access any cryptocurrency in a given address, are never broadcast online and made vulnerable to hackers who could be scanning a network. Any hacker who comes across a transaction that was generated using a cold storage wallet would have no way to access any private keys.
Think of cold storage as Fort Knox for your cryptocurrencies.