You can buy cryptocurrency from any exchange but where do you keep it? Even if it’s digital money, you need a place to store it. Just like you keep a wallet for your cash, you need a wallet to keep your cryptocurrency. Now, you may be thinking, “What kind of wallet supports virtual money?”
Cryptocurrency wallets are largely of two types-hot and cold. The main difference is that hot wallets remain ‘online’ or connected to the internet while cold wallets remain ‘offline’ or disconnected from the internet.
Cold wallets or cold storage, therefore, means storing Bitcoin and other cryptocurrencies on devices not connected to the internet. This means that your crypto remains safe from cyber attacks and unauthorized access that wallets connected to the internet are susceptible to.
Even though there are many types, the most commonly used cold wallets are hardware wallets which are physical devices that you have to manually connect to your computer whenever you want to make a crypto transaction. Ledger Nano X and Trezor Model T are some examples of popular cold wallets.
How Do Cold Wallets Work?
Now that we’ve made clear that the defining feature of cold wallets is that they remain offline, the question that arises is how they work. After all, cryptocurrency transactions are conducted online. How would a wallet that is not connected to the Internet facilitate such transactions that require an internet connection?
To understand this, let us go back to the basics of cryptocurrency. We know that cryptocurrencies are secured by a technology called cryptography and you need public and private keys to access your crypto. Public keys are akin to simple addresses that tell the destination where the coins would be sent. Private keys, however, can only be accessed by the owner of the wallet.
In cold wallets, these private keys are stored offline. When you want to do a transaction, you would connect your wallet to a device with an internet connection. After a transaction is initiated online, it is transferred to the offline wallet. Here, it is digitally signed and then sent back or broadcasted to the entire network.
During this whole time, the private keys do not come into contact with any online server even once. This ensures that even if a hacker can see the transaction, they would not be able to manipulate it by gaining access to the private keys.
After the transaction is completed, the wallet is disconnected from the device making sure that the crypto and the private key remain offline.
Types of Cold Wallets
While the term ‘cold wallet’ brings to mind images of heavy hardware devices, there are actually several types of cold storage options for cryptocurrency. Essentially, any crypto storage method not connected to the internet can be termed as a cold wallet.
As the name suggests, these are simple pieces of paper with information about your public and private keys written on them. It is the cheapest option and most paper wallets would have an embedded QR code for quick transactions.
However, it is essential to take utmost care to ensure the security of your paper wallets. This is because if you lose or accidentally destroy the paper, you would lose access to your cryptocurrency forever.
This is the most common method used for storing crypto assets offline. These are physical devices and most of them look like USB drives. They either use a smart card or an offline device to generate and store private keys.
You can get a hardware wallet from any reputable merchant or retailer who keeps them. You can get any type of wallet you want- from the most bare-bones one to an advanced one with Bluetooth and multi-signature(multisig) technology.
This is a rather obscure method of storing private keys. Sound wallets convert a user’s private keys into audio files and store them in an encrypted form in mediums like CDs or even vinyl records. The code in the audio file can be deciphered using a spectroscope app.
Offline Software Wallets
These are not purely cold storage devices but rather a hybrid method using both hot and cold wallet technology to store keys. You can consider such wallets as being split into two parts or having two compartments- an online one that keeps the public keys and an offline one that stores the private keys.
Cold Wallets and Crypto Protection
Cold wallets are often touted as the most secure way of storing cryptocurrency. They keep the user’s private key offline which doesn’t ever come into contact with an online server when a transaction is being processed.
This is perhaps the biggest plus point of cold wallets because when private keys are stored online, as is the case with hot wallets, a hacker may gain access to the private key when a transaction is transmitted online. This possibility is eliminated in cold wallets.
Further, many wallets these days use multi-signature (multisig) technology for better security of assets. Here, multiple signatures are needed to approve a transaction. This minimizes the possibility of unauthorized transactions and makes crypto trading more secure.
However, this does not mean that cold wallets are a foolproof method of storing crypto. Even though a lot of wallets these days are password protected and have other security features, there is always a possibility that you would lose your funds if you misplace your hardware device.
Also, remember that you would lose access to your funds forever if you lose the seed phrase itself. The phrase can be used by bad actors to generate a new key and deprive you of access to your cryptocurrency.
Therefore, it is important to ensure that you keep your hardware wallet in a safe space.
Cold Wallet Frequently Asked Questions(FAQs)
What is an example of a Cold Wallet?
Ledger and Trezor are brands known for their crypto-cold wallets. Even among them, Ledger Nano X, Ledger Nano S Plus, and Trezor Model T are popular models known for their strong security and several other features.
How do I get a Cold Wallet?
Cold Wallets are hardware devices that often resemble USB sticks. You can get them either from the brands’ website or from any retailer- online or offline that keeps them for sale.
Is Trust Wallet a Cold Wallet?
No, Trust Wallet is not a cold wallet. It is what is known as a hot wallet. It is a non-custodial wallet that you can download and access from any device as long as you have an internet connection. It is available both as an app as well as a browser extension.
Can a Cold Wallet be Hacked?
While it is difficult to directly hack cold wallets, it is another story if you lose the wallet itself. While cold wallets have in-built protection features, the possibility of someone breaching those barriers and accessing your wallet still remains. Plus, if someone knows your seed phrase, they can simply generate a new key to get access to your crypto assets.
The Bottom Line
Cold wallets are devices where you can securely store your cryptocurrency. Whether it is paper, hardware or sound wallets, the common thread is that they remain offline i.e. unconnected to the internet. While this keeps your crypto secure, there is certainly a trade-off of security with convenience as you have to connect your wallet every time to your computer for crypto trading.
What kind of wallet you should get depends on your requirements. Both hot and cold wallets have their merits and demerits. You need to evaluate your needs and priorities and decide whether you should use a cold wallet, a hot one, or a mixture of both.