Coinbase CEO clears up four misconceptions about hot and cold wallets

23 Feb, 2019
by Richard Allen
Coinbase CEO clears up four misconceptions about hot and cold wallets

Brian Armstrong, CEO and co-founder of San Francisco-based Coinbase decided to address some common misconceptions doing the rounds about hot and cold cryptocurrency custody and storage solutions.

In an article on Fortune, Armstrong explains that the first misconception is that “you can’t trade crypto using funds in cold storage.” He explains that platforms like Coinbase Custody let users trade over-the-counter using delayed settlement. In other words, users can trade while their funds are stored offline.

Secondly, Armstrong states that it's inaccurate to believe “you can’t ‘stake’ (or earn interest on) funds in cold storage.” He explains that Tezos offers a method for earning interest on your crypto while keeping them in cold storage:

Read more: Coinbase announces new acquisition, wants to become 'Google of crypto'

“… you can delegate your funds in cold storage to a ‘baker’ and earn interest. The baker, which acts as the staking equivalent of a miner in the Bitcoin example, keeps a smaller percentage of funds online—and those don’t need to be customer funds. In other words, customer funds are kept safely offline but are still fully able to participate in the network, earning a yield for the customer.”

The third misconception is believing that cold storage means relying on a single authorized user who could lose funds. “A well-designed crypto custody solution doesn’t rely on any single person,” he explains. He adds that “Instead, it utilizes multiple keys to achieve consensus and redundancy.”

The final misconception Armstrong touches on is that hardware security models (HSMs) are just as good as cold storage. While these are a great security tool, they don’t quite match the security offered by cold storage. By keeping them offline, “a remote hacker can’t access them without some physical attack as well,” he states.

Read more: Coinbase CEO Brian Armstrong shares his views on QaudrigaCX

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