Cold storage wallets offer the best crypto security to guard your digital assets in the precarious conditions of bear markets.
With some crypto platforms currently freezing withdrawals due to harsh market conditions, the need for self-custody has become more important.
Centralised exchanges such as Coinbase (COIN), Gemini and Binance have so far honoured the escalation of redemptions amid the current crypto-crash, but ultimately you don't own digital assets until you hold them in your own wallet where you control the private keys.
You can do this by creating a new crypto address and storing the private keys for accessing it in a secure offline format, usually a flash-drive called a cold storage wallet.
Since the terra/Luna crash in May, crypto-platforms such as the Celsius Network have frozen accounts due to the spike in redemptions and the Voyager Digital exchange restricted the daily withdrawal limit to $10,000 (£8,140) because of exposure to the crisis-laden Three Arrows Capital crypto hedge-fund.
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Three Arrows Capital has reportedly filed for bankruptcy, after receiving a reprimand from the Monetary Authority of Singapore (MAS), where it is legally domiciled.
The MAS issued a public reprimand of Three Arrows Capital for providing “misleading information to the regulator and exceeding the threshold set for assets under management".
This was in reference to a 2021 position in the Grayscale Bitcoin Trust (GBTC) that amounted to $1.2bn.
However, in Singapore, Three Arrows Capital is only registered to manage assets under $180m.
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The MAS note also stated that “in light of recent developments which call into question the solvency of the fund managed by Three Arrows, MAS is assessing if there were further breaches by Three Arrows of MAS’s regulations".
As the contagion spreads, centralised crypto exchanges have sought credit lines from Sam Bankman-Fried's FTX and Alameda Research while Voyager Digital announced it had made an agreement with Alameda Research for a credit line of $200m and BlockFi secured a loan of $250m from FTX in order to shore up collateral.
Now, the expression “not your keys, not your coins” is more meaningful than ever as people fear being locked out of their accounts on centralised exchanges and lending platforms.
Investors are sending their private keys to offline devices called cold storage wallets in an effort to protect their digital assets.
Cold storage wallet
Below is a step-by-step guide on how to create a new crypto address and store the private keys for accessing it in a secure offline format, usually a flash-drive called a cold storage wallet.
There are many different types of cold storage wallets that can be used to store crypto from companies like Trezor and Ledger.
Ledger is one of the most popular providers of cold storage wallets, with products such as the Nano X or Nano S, which look like USB sticks with small digital interfaces. They typically cost between $50 and $300.
After you have purchased a hardware wallet and plugged it into your computer, you will download the app that comes with the device.
This app will allow you to create a new wallet whose private keys will be stored on your cold storage device.
You will then be given a seed phrase, which you must write down on a piece of paper and keep offline.
This seed phrase will allow you access to your private keys if your cold storage device is lost or destroyed.
You will then set up a PIN for accessing your device. After entering and confirming your pin you can select the coins you want to store on your wallet.
How to set up and add crypto to a cold storage wallet
1. The Set-up
Plug one end of the USB cable provided with your cold storage wallet into the device itself, and plug the other end into your computer.
2. Installing cold storage wallet application
The installation application that comes with your cold storage wallet will attempt to download onto your computer. Select the download for either Windows or macOS.
3. Adding specific cryptocurrency blockchains
You will now be asked to create a new wallet for a specific cryptocurrency blockchain, such as bitcoin, ethereum or dogecoin.
Select the blockchain of the cryptocurrency that you wish to store then click "create new wallet" and confirm creation on your cold storage device.
4. Adding seed phrase backup code
You will now be given a "standard seed backup" code. You must keep this in a safe, off-line, place.
This will give you access to your private keys if you lose your cold storage wallet. Once selected, it will tell you that you have successfully created it.
It is advised to write these seed phrase words down in paper and never store them online. You will then have to enter the seed phrase keywords back into your cold storage wallet device to confirm them.
5. Create your PIN
You will then be asked to create a pin to access your device. Click "Set PIN."
After setting your pin you will then be able to store the private keys to your cryptocurrencies on your device. Usually bitcoin and ethereum are set up by default. If you want to add bitcoin to your cold storage wallet click "receive" to get your address.
6. Transfer cryptocurrencies from online 'hot wallet' to cold storage wallet
Go to the online exchange or other "hot wallet" location where your bitcoin or other cryptocurrencies are stored and send them to your new cold storage wallet address.
Apart from your cold storage wallet getting lost or damaged, another danger is buying your crypto cold storage wallets from an unofficial supplier. You could end up with a rigged device that has pre-programmed seed words that can be used to unlock your assets.
The easiest way to protect against receiving a corrupted device is to buy directly known official manufacturers of cold storage wallets, such as Trezor, Ledger or Keep Key.