Cold Storage
Holding crypto assets offline, away from exchanges and internet-connected systems.
Also called: cold wallet · hardware wallet · self custody
Written by Javier Sánchez Ros
In plain language
Cold storage keeps private keys on a device that is never connected to the internet, which removes an entire class of remote attack.
Assets held on an exchange are, legally and practically, a claim on that exchange rather than something you directly control.
The tradeoff is speed and responsibility. Cold assets cannot be traded instantly, and losing the keys means losing the assets permanently.
Worked through
FTX, November 2022 — the risk underneath all the others
FTX was the second-largest crypto exchange in the world. On 8 November 2022 it halted customer withdrawals, and on 11 November it filed for bankruptcy. Balances that had shown as available a week earlier became claims in a bankruptcy court, and customers waited years rather than days to see any of it.
No stop loss addressed this. No position size addressed it either. Every risk control a trader applies operates inside the exchange, and this was the exchange itself failing — a risk that sits underneath all the others and is invisible on every chart.
The defence is boring and it is the only one there is: keep on an exchange what you need in order to trade, and hold the rest somewhere the exchange cannot spend. A trader running a $2,000 book does not need a $40,000 balance sitting there for convenience. That convenience is an unhedged bet on a company’s solvency.
Why it matters
Exchange failure is a risk that has nothing to do with your trading and cannot be hedged by any stop loss. It is managed by not keeping more on an exchange than you need to trade.
Common mistakes
- Keeping an entire portfolio on an exchange for the convenience of trading a fraction of it.
- Storing recovery phrases digitally, which reintroduces the risk cold storage was meant to remove.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
A market where assets are bought and sold for immediate delivery and full ownership.
The firm that routes your orders to the market and holds your account.
The set of rules that decides how much you can lose, before you think about what you can win.
A crypto asset designed to hold a fixed value, usually one US dollar.
Any cryptocurrency other than bitcoin.