A cold wallet is an offline blockchain wallet used for storing cryptocurrencies. They are permanently disconnected from the internet. Cold wallets keep crypto safe from cyberattacks, malware, and online fraudsters.
Even though the crypto industry has been around for a decade, it’s still highly susceptible to cyberattacks, and online scams. The crypto framework is decentralized and untraceable. If your coins get stolen, best believe they are gone for good.
In this article, we’ll explain what cold wallets are and the numerous security benefits they provide. Keep reading!
Key Highlights
- A cold wallet is an offline blockchain wallet used for storing cryptocurrencies. They are permanently disconnected from the internet.
- Cold wallets keep cryptos safe from cyberattacks, malware, and online fraudsters
- Cold wallets help keep private keys offline during transactions. Your wallet’s information is not stored anywhere on the internet.
- Ledger Nano X, Ledger Nano X, and Trezor Model T are some of the best hardware cold wallets available today.
- Hot storage wallets are digital currency wallets connected to the internet.
What is a Cold Wallet?
A cold wallet is an offline crypto wallet used for the storage of bitcoin and altcoins. The wallet is not connected to the internet which means it is safe from cyberattacks, unauthorized logins, and other online scams. They are perfect for storing and protecting large amounts of crypto.
Cold wallets are mostly used by centralized exchanges, organizations with crypto investments, and wealthy investors. However, most day-to-day crypto players don’t use or own a cold wallet. They prefer to keep their tokens on trusted exchanges like Binance and TrustWallet. This has led some to question if a cold wallet is really necessary.
Is a cold wallet necessary?
Cold wallets are necessary for long-term investors with huge crypto assets. Any sort of online theft or cyberattack could result in huge losses. Big money investors (whales) don’t have any safer storage options for their crypto assets. If you are a crypto trader or you own limited crypto assets, you may not need a cold wallet.
Crypto traders are out for short-term profits from price fluctuations and they need hot wallets to be able to dispose of their cryptos pretty fast. However, if you have large amounts of crypto, it is not wise to keep everything in your trading wallet. The best move is to store the bulk of your assets in a cold wallet and trade with the rest. You get to enjoy the best of both hot and cold wallets.
How Does a Cold Wallet Work?
Blockchain wallets have two major components – the public and private keys. When you open a non-custodial wallet, you get access to your private and public keys. You can decide to store the crypto online (hot wallets) or offline (cold wallets). Cold wallets are safe because your private keys are not kept anywhere on the internet.
Hardware wallets work by helping you access your private keys in an offline space. This means you can log into your wallet offline using your private keys. However, you need to connect to the internet when you want to make wallet to wallet transactions. Your private keys do not come in contact with a server during the process and are safe from all cyberattacks. Here’s how investors use their cold wallets;
- Step 1 – Connect the cold wallet (hardware wallet) to an online computer.
- Step 2 – Select the option to receive or send a token. If you want to receive tokens, an address is automatically generated for you.
- Step 3 – To receive tokens, send the generated address to the sender and wait for your coins. To send tokens, simply input the receiver’s wallet and click send.
- Step 4 – Disconnect the hardware wallet from the online computer. Your private keys are kept on the hardware wallet through this process, and the information remains offline once you disconnect.
Cold Wallet Offline storage
The steps above might seem a little confusing so we’ll break them down.
- Let’s assume you own a cold hardware wallet, and you want to receive $1,000,000 from your hot wallet or other sources.
- You need to connect the hardware wallet to your internet-enabled computer, allow it to generate a crypto address (public key), and then receive the crypto.
You get to store your funds without compromising the security of both your public and private keys.
- If you want to send crypto from your cold wallet to another wallet, the process is the same.
- Connect to your computer, enter the recipient’s address, and send. However, not all cold wallets are hardware wallets and the transaction process is different for others.
Types of Cold WalletPaper Wallet
Paper wallets are unique cold wallets stored on printed documents. Your public and private keys are printed out and kept in a secure place. The information can also be encoded in a QR code for convenience. Paper wallets are vulnerable to physical attacks. If the document gets stolen, you’ll lose access to all your crypto. Millennial parents can add bitcoin to their kids’ inheritance portfolio by keeping paper wallets in a secure bank vault.
Desktop Wallet
A desktop wallet is a type of cold wallet that involves storing your public and private keys on an offline desktop. The desktop is permanently disconnected from the internet which means your private keys are safe from cyberattacks. However, you need to bring it online when you want to perform a transaction. Most crypto experts don’t see desktop wallets as cold storage because of their easy accessibility. It is the perfect option for active crypto traders.
Hardware Wallet
Hardware wallets are cold storage devices capable of securing and generating private keys offline. They are sold commercially and are mostly designed like USB drives. If you lose this device, you lose your crypto forever so it’s important to keep it in a safe, secure space. Hardware wallets can have varying features depending on the manufacturer. Some are multi-signatory while others have buttons and LED interfaces.
Sound Wallet
A sound wallet is an expensive cold wallet that stores private and public keys in encoded musical records. Your keys are recorded on a tape, vinyl disk, or CD and hidden away in a secure place. The benefit of sound wallets over other types of cold wallets is your crypto is safe. The keys are hidden within the audio files and can only be deciphered by the owner. However, if these records get damaged, you’ll lose your coins permanently.
Why Cold Wallet is Important for Investors
Cold wallets are the safest storage system for cryptocurrency. If you want to invest long-term in BTC or ETH, the best place to store them is offline. You don’t want a situation where Bitcoin is trading at say $200,000 and you are unable to access your coins because your CEX or DEX is ‘Currently restricting withdrawals’. There are many reasons why a cold wallet is important for investors and some of them include;
Offline Private Key Storage
The major benefit of a cold wallet is offline private key storage. Anyone with your private keys can log in to your wallet and withdraw your crypto in minutes. If your private keys are stored online, they are vulnerable to cyberattacks and online fraudsters. Investors with large crypto assets ($100,00) cannot afford to store their private keys online.
Increased Security Features
All cold wallets have increased security features. They are stored in secure places like bank vaults or home safes. If you get a hardware wallet, it comes with a pin password, and sometimes biometric protection. This means nobody can open the wallet except you. Paper wallets are stored in safe documents and sound wallets can stay on shelves for years.
Multiple Crypto Storage
Cold wallets can store a wide range of cryptos. The wallet providers design them to hold bitcoins and most altcoins. However, some cold hardware wallets might not receive new, unrecognized crypto tokens (and shit-coins too…we mustn’t forget that).
Safe from malware, cyberattacks, and online scammers
Malware, cyberattacks, and phishing sites are common occurrences in the crypto space. These attacks are usually targeted at the private keys of online wallets. This is why most investors prefer to store their crypto offline in cold storage wallets.
Hardware transaction verification
Hardware wallets are designed to keep your private keys offline by signing transactions offline. This means you can log in to your wallet offline but you will need the internet to make wallet to wallet transactions. All transactions must be verified from your hardware wallet and this keeps your crypto safe.
Best Cold Wallets for Crypto
Cold wallets are available for purchase online. Even though some of them are quite expensive, the price is small compared to the security they provide. If you are thinking of getting a cold wallet, here are some of the best ones on the market;
Ledger Nano X
Ledger Nano X is one of the best hardware wallets in the world. This wallet can support up to 5,500+ tokens and it can hold 100 different assets at the same time. The Ledger Nano X wallet is secured with a 6-character pin password and a mnemonic 24-word code.
You can connect to it via Bluetooth or USB-C cable. One unique advantage Ledger has is its Ledger Live app. You can buy and trade your crypto at a moment’s notice via inbuilt exchange channels. The drawback of this crypto wallet is its price.
Trezor Model T
Crypto traders will love the Trezor Model T hardware wallet. Specific third-party exchanges are accessible on the platform from the Trezor internet interface. The wallet has a touch screen that makes it easy to monitor and control your assets. The package comes with two recovery seed cards.
The USB-C to USB-A cable helps you connect to a desktop, smartphone, and Bluetooth. Trezor supports up to 1,800 cryptos and it is a good wallet for rich crypto traders. However, it is not the safest or most ideal for long-term investors.
Ledger Nano S
The Ledger Nano S is another top product from Ledger, the leading cold wallet manufacturer in the world. The Ledger Nano S also gives you access to Ledger Live App so you can monitor and have maximum control over your crypto. It is designed as a USB drive and it comes with three recovery sheets.
Ledger Nano S allows you to set a 20-digit recovery password. However, operating it might be a bit complex for new users. Still, it is one of the most affordable cold wallets available.
ELLIPAL Titan Mini
ELLIPAL Titan Mini is one of the most secure cold wallets out there today. Its metal build and air-gapped design keep it safe from water and dust. It comes with a ‘big’ screen which makes it easy to use. You can set it up within three minutes and link with the ELLIPAL mobile app for seamless trading.
This hardware wallet supports up to 41 blockchains and 10,000 tokens and automatically eliminates data when a breach is detected. The complete network isolation design makes it 100% safe from cyberattacks.
Types of Crypto Storage
There are 4 major categories of crypto wallets. They include custodial wallets, non-custodial wallets, hot wallets, and cold wallets.
All custodial wallets are hot wallets because they are stored with CEXs online. All cold wallets are non-custodial wallets because they are fully controlled by the owner of the crypto assets. Here, we take a closer at these different types of crypto storage
Custodial & Non-custodial wallet
Custodial Wallet
A custodial wallet is a crypto wallet whose private keys are held and managed by the opening platform. Hence, you get your public keys but the private keys are controlled by another entity. This simply means you don’t have full control over your crypto assets even if you have access to the private keys.
Centralized exchanges and some blockchain platforms maintain custodial wallets for their users. However, the November 2022 FTX case has taught investors to be wiser and opt for non-custodial wallets.
Non-custodial Wallet
A non-custodial wallet is a blockchain wallet whose private keys are fully controlled by the owner. When you open this type of wallet, you get your mnemonic which can be stored in your Gmail or written paper. Nobody has access to your crypto except you. It is also referred to as a self-custodial wallet.
Platforms like TrustWallet and MetaMask allow you to open non-custodial wallets. Wallets like these are hot storage self-custodial wallets while all cold wallets are Self-custodial. This is because they are offline wallets and only the owners have access to the private keys.
Differences between a custodial and non-custodial wallet
Custodial and non-custodial wallets are different in many ways. However, both of them have their advantages and disadvantages. Self-custodial wallets provide more security than custodial wallets while custodial wallets help you stay liquid as a trader. Some of the major differences between these two wallets include;
- Control – For Custodial wallets, the blockchain provider retains control of the private keys. Some platforms allow for joint control of the platform to facilitate their services to you. Non-custodial wallets give you full control over your private keys.
- Cost – Custodial wallets cost nothing to open because CEXs will open them for free. Hot non-custodial wallets also cost nothing since they are online. However, cold storage non-custodial wallets are expensive to purchase. Some cold wallets cost as much as $250.
- Risk – The holder of the private keys bears the responsibility for the wallet. If you open a Custodial wallet on a platform like Binance, they are responsible for protecting your wallet from theft, attacks, and everything else. However, if you own a self-custodial wallet, you are responsible for protecting your private keys.
Hot & Cold Wallet
Hot wallets are crypto wallets that have both their public and private keys stored online. If your private keys are on a server connected to the internet, then you are using a hot wallet. Hot wallets are opened on both centralized and decentralized platforms.
With hot wallets, you may or may not have full control over your private keys. However, you always have quick access to the internet and you can easily take advantage of the crypto price fluctuations to make a profit. Hot wallets are recommended for crypto traders. Some of them include Phantom, TrustWallet, MetaMask, and Binance.
Differences between Hot and Cold Wallet
Digital currencies don’t have physical forms and there are only two places you can keep them – Hot storage wallets or cold storage wallets. Here are some of the major differences between Hot and cold wallets.
- Safety – Hot wallets can’t come close to cold wallets in terms of security. Cold wallets store private keys offline which means cyberattacks, malware, and online scammers can never access your wallet. However, most CEXs provide adequate security for their customers. However, don’t forget that the CEX itself can be a security threat. Customers of FTX are still licking their wounds from their collapse in November. 2022. Cold wallets remain the best storage means for crypto assets.
- Price – Hot wallets are far cheaper than cold wallets. All of them come for free. All you need to do is sign and buy or transfer some crypto to your account. It’s not the same with a hardware wallet. Hardware wallets are physical products and most of them cost between $50 and $300.
- Convenience – Hot wallets are generally more convenient to the everyday crypto speculator than cold wallets. Since they are already connected to the internet, you can trade with lightning speed and make money from price fluctuations in the market. On the other hand, cold wallets are rigid and don’t offer much room for flexibility. Even hardware wallets with live apps will trade slower than a CEX like Binance.
Setting Up a Cold Wallet
When you buy a cold hardware wallet, the package usually contains a setup manual. However, if you want to open and set up a cold wallet ‘online’ without spending a dime on hardware, you can do it on Bitcoin.com.
The first step is to create an offline Bitcoin address. You get a Public/Private key Pair that won’t go through the internet. Buying, selling, and redeeming bitcoins is relatively easy after your wallet is set up.
Conclusion
Cold wallets are the best storage systems for cryptocurrencies. They are perfect for long-term investors who want to secure a sizable number of tokens for the future. If you want to invest $100,000 in bitcoin, you best keep it in a cold wallet. With your private keys offline, nobody will be able to hack or steal from your wallet. You can log in five years later and take your profit when BTC is $1,000,000 or bear your losses at $0.
