Cold Wallet: What It Is, How it Works & Tips
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Written by
Rahul Nambiampurath - Updated 2024-08-26 09:58:32
A cold wallet is an essential tool for anyone who is serious about protecting their cryptocurrency. This article provides you with detailed explanations of what a cold wallet is, what kinds of cold wallets are out there, and gives you tips on how to use them.
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What is a Cold Wallet?
A cold wallet is a physical device that stores your cryptocurrency's private keys offline. This makes it much more secure than storing your keys on a hot wallet connected to the internet.
There are two main types of cold wallets:
Hardware wallets are physical devices that look like USB drives. They store your private keys in a secure chip that is not connected to the internet. Some popular hardware wallets include the Ledger Nano X, Trezor Model T, and KeepKey.
Paper wallets are physical sheets of paper that contain your private keys printed in QR code format. Paper wallets are the simplest and cheapest way to store your cryptocurrency offline, but they are also the most vulnerable to theft or damage.
Cold wallets are the best way to store your cryptocurrency if you are concerned about security. They are much less likely to be hacked than hot wallets, and they offer the best protection against malware and viruses.
How Does Cold Wallet Work?
Cold wallet, also known as cold storage, is a term used in cryptocurrency to describe storing cryptocurrency offline. This means that your digital wallet is not connected to the internet, which makes it much more secure from hackers and malware.
Process:
Initially, you'll create a seed phrase, a series of words that act as the key to your cryptocurrency. This phrase is crucial for accessing and managing your assets.
The seed phrase must be kept offline, away from potential online vulnerabilities. Storage options include hardware wallets or paper wallets.
To move cryptocurrency from cold storage, the device holding your private key connects to an online computer. This setup allows for secure transaction signing and transmission.
Why Do You Need a Cold Wallet?
You might need a cold wallet for your cryptocurrency for several reasons:
Stronger security: As mentioned above, cold wallets are much more secure than hot wallets because they are not connected to the internet. Because of that, your private keys are not vulnerable to hackers or malware. If you hold a large amount of cryptocurrency, using a cold wallet to protect your investment is essential.
Offline storage: If you are concerned about the possibility of stealing your cryptocurrency, a cold wallet is the best way to store your tokens. With a cold wallet, your private keys are stored offline, and they cannot be accessed by anyone who does not have physical possession of the wallet. This makes it much more difficult for hackers to steal your cryptocurrency.
Protection from malware and viruses: Hot wallets are vulnerable to malware and viruses that can steal your private keys. Cold wallets, on the other hand, are not connected to the internet, so they are not susceptible to these attacks.
Convenience for making small transactions: While cold wallets are not ideal for making frequent transactions, they are convenient for making occasional purchases or sending cryptocurrency to friends or family. When you need to make a transaction, you can simply connect your cold wallet to your computer and send your cryptocurrency from the cold wallet or phone.
Durability: Cold wallets are durable and can withstand a lot of wear and tear. This means that you can store your cryptocurrency for many years without worrying about it being damaged.
Popular Cold Wallets
Ledger
Ledger is a French company that was founded in 2014. It is one of the most popular hardware wallets in the world, known for its user-friendly interface and wide range of supported cryptocurrencies. Ledger offers two main models of hardware wallets: the Ledger Nano S and Ledger Nano X.
KeepKey
KeepKey is an American company that was founded in 2015. It is a popular hardware wallet known for its large screen and ability to store many cryptocurrencies. KeepKey offers one main model of hardware wallet: the KeepKey Hardware Wallet.
Trezor
Trezor is a Czech company that was founded in 2014. It is one of the oldest and most respected hardware wallets in the world. Trezor offers one main model of hardware wallet: the Trezor Model T.
Types of Cold Wallet
Cold wallets can be custodial or non-custodial, each with unique implications for key management and security.
Custodial wallets: Here, a third party holds the private keys, simplifying usage but introducing potential security concerns.
Non-custodial wallets: You have direct control over your private keys, enhancing security at the cost of added responsibility for their safekeeping.
Hardware Wallets
Hardware wallets are physical devices that store your private keys offline. They are very secure, as they are not connected to the internet and are therefore not vulnerable to hackers.
Hardware wallets are also very convenient to use, as they can be plugged into your computer or mobile device to make transactions. Some popular hardware wallets include Ledger Nano X, Trezor Model T, and Keepkey.
Software Wallets
Software wallets work differently than hardware ones. They are software applications that are installed on your computer or mobile device. They store your private keys on your computer or mobile device, which means that they are vulnerable to hackers if your computer or mobile device is infected with malware.
Software wallets are typically more convenient to use than hardware wallets, as you do not need to carry a physical device with you. Some popular software wallets include Exodus, Electrum, and MetaMask.
Paper Wallets
Paper wallets are physical pieces of paper that contain your private keys printed in QR code format. Paper wallets are the most secure type of wallet, as they are not connected to the internet and are immune to malware attacks.
However, paper wallets are also the most inconvenient to use, as you need to scan the QR code with your phone or computer to make transactions.
Tips for Using Cold Wallets
- Keep private keys offline by storing them on a physical device like a hardware wallet or paper wallet. Hardware wallets, being tamper-proof, offer better security against malware than paper wallets.
- Secure Backup of seed phrase for recovering your cryptocurrency in case of hardware wallet loss. Never store it online or share it with anyone to prevent unauthorized access.
- Ensure the security of your hardware or software wallets by regularly updating their firmware. This helps fix bugs and address potential vulnerabilities, keeping your wallets protected from the latest threats.
- Verify your recovery process to quickly and easily regain access to your cryptocurrency in case of a lost or stolen hardware wallet.
- Keep your hardware wallet physically secure by storing it in a safe place inaccessible to others. Avoid using it in public spaces to minimize the risk of theft or loss.
- When making transactions, use a secure environment by ensuring your computer is free of malware and connected to a secure network. Avoid public Wi-Fi networks, as they are often less secure than private ones.
Final Thoughts on Cold Wallet
Cold wallets are essential for anyone serious about protecting their cryptocurrency. They keep your private keys offline, protecting against hackers, malware, and other online threats. Whether you opt for a hardware wallet, known for its durability and convenience, or a paper wallet because of its simplicity and low cost, cold wallets offer extra security. For more insights, check out our guide to the best crypto wallets.
FAQ About Cold Wallet
Is a cold storage wallet worth it?
Yes. Cold storage wallets are worth it for the security they provide.
What is the most secure cold storage wallet?
Trezor is the most secure cold storage wallet.
Is cold storage best for cryptocurrency?
Yes. Cold storage is the best way to store cryptocurrency.
What happens when you put cryptocurrency in cold storage?
When you put cryptocurrency in cold storage, you are storing it offline in a secure location.
Is Coinbase's wallet cold storage?
No. Coinbase's wallet is a hot wallet, which means it is connected to the internet.
