What Is a Cold Wallet?
A cold wallet is a type of cryptocurrency wallet that is not connected to the internet and allows you to access your crypto on the blockchain.
A cold wallet doesn’t actually store cryptocurrency but rather stores the private keys needed to access it.
The primary use case for Cold wallets is long-term storage.
How Does Cold Wallet Work?
Crypto always lives on the blockchain, but wallets store the public and private keys required to access it and use it for transactions.
Cold wallets, also called hardware wallets, store the private keys fully offline. They’re typically a device that resembles a large thumb drive and can be thought of as a safe for your crypto.
They connect to your device through a USB cord or Bluetooth connection, allowing you to “move” crypto through transactions on the blockchain between your cold wallet and hot wallets.
Crypto never actually moves off the blockchain, but you can dictate which wallet stores the keys that access specific coins you own.
Is Cold Wallet Safe?
Yes, cold wallets are safe, especially from reputable brands like Ledger.
“Since cold storage wallets aren’t connected to the internet, they aren’t susceptible to online attacks”
(Vaultavo, 2022)
This can be a security advantage over hot wallets, which are connected to the internet.
The risk with cold wallets is losing your secret seed phrase. Losing or damaging the device is fine as long as you have your recovery phrase. You can buy a new hardware wallet and recover your digital assets.
However, since you have full custody of your assets and anything happens to the seed phrase, you won’t be able to access that crypto ever again. You need to treat your seed phrase like a vault holding all your money, keeping it in a safe, cool, dry location.
What Are The Differences Between Cold Wallet and Hot Wallet?
The key difference between a cold wallet and a hot wallet is that a cold wallet is a physical, offline device, and a hot wallet is an online application.
“While cold wallets hold user deposits, hot wallets are responsible for addressing withdrawal requests”
(Ebrahimi et al., 2012).
They both store crypto keys to allow you to access your holdings, but hot wallets are online platforms that allow you to actively send and receive crypto. As with any app connected to the internet, they’re open to data breaches and hacks, which can lead to theft.
Cold wallet crypto are dormant holdings that can’t be used to trade actively, but are very secure as long as the device is kept safe.
Types of Cold Wallet
There are three main types of cold wallets: paper wallets, sound wallets, and hardware wallets.
Paper Wallets
Paper wallets are pieces of paper that store crypto keys. You create the wallet offline, consisting of a public and private key, and they’re then printed out. They’re typically free to create, making them a cost-effective option.
While paper wallets have the advantage of being offline and secure, they’re very easy to lose or damage, which would prevent you from accessing your crypto.
Sound Wallets
Sound wallets are a unique way to store crypto keys. The private key is an audio file that reads out a string of words. It can be stored on a vinyl record, CD, or USB drive.
It’s generally an expensive cold wallet option and is more of a novelty item, but it’s a legitimate way to safeguard your crypto.
Hardware Wallets
Hardware wallets are physical devices that connect through USB or Bluetooth and are a reliable cold wallet option. Ledger is the most popular brand of hardware wallets, making them easy to use and reliable.
The devices typically resemble a large thumb drive or external hard drive. They have a small LED screen and a few basic button controls. They usually cost between $30 and $100, making them affordable while providing strong security.
Vaultavo. (2022). Cryptocurrency Wallets. Vaultavo, 2-5.
https://vaultavo.com/wp-content/uploads/2022/12/Cryptocurrency-Wallets.pdfEbrahimi, S., Hasanizadeh, P., Aghamirmohammadali, S., Akbari, A. (2012). Enhancing Cold Wallet Security with Native Multi-Signature schemes in Centralized Exchanges, Nobitex.
https://arxiv.org/pdf/2110.00274
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