In the crypto world, we say, "Not your keys, not your coins." This means that if you don't have custody of your crypto keys, you don't control the assets in the wallet. With the value of cryptocurrency rising, it's vital to find a reliable way to store them securely.
A cold wallet is designed to store cryptocurrency and other digital assets without an internet connection. Cold wallets, also known as offline wallets or cold storage wallets, are hardware devices that protect private keys from online threats by keeping them offline.
'Cold wallet' and 'hardware wallet' are often used interchangeably, but this isn't entirely accurate. Cold wallets can take various forms, but not all hardware wallets are cold wallets. To better understand why, let's first explore the purpose of a cold wallet.
What is the purpose of a cold wallet?
A cold wallet is an excellent option if you're looking to safeguard your high-value crypto assets for an extended period. Its security features keep your keys offline and protect you from on-chain threats.
Your cryptocurrencies are not stored in crypto wallets but in an account on the blockchain, and the private key stored in your wallet gives you control over that account. This detail is crucial because your wallet's private key storage affects your accounts' security.
When using a hot wallet, such as a software wallet, your private keys are stored on a device connected to the internet. Unfortunately, you risk losing your private keys to hackers through your internet connection.
Types of cold wallets
While all cold wallets serve the purpose of keeping your private keys offline, there are differences in terms of security, user experience, and accessibility that you should consider.
Paper wallets
One option for storing cryptocurrency is using paper wallets with private keys printed on them, often in the form of a QR code. Users can use the paper wallet address to transact with their cryptocurrency, sending and receiving as needed.
While this method keeps your keys offline, paper wallets can be easily damaged or lost, and there is no way to recover your keys if this happens since they don't use secret recovery phrases.
In addition, transferring cryptocurrency from a paper wallet can be challenging. To import it into a software (hot) wallet, you'll need to connect to the internet, compromising your keys' privacy and security.
Moreover, if your paper wallet ends up in the wrong hands, your assets could be lost forever since the private keys are all an attacker needs to access your account.
Sound wallets
Storing private keys on sound wallets is more durable than paper wallets since they save private keys as audio files. However, sound wallets still have their weaknesses, as they are still susceptible to physical damage. Losing access to your accounts because of a scratched CD that stores private keys is not ideal.
Additionally, sound wallets can be expensive to maintain because they need specific tools to decode private keys, like a spectroscope application. This complexity makes it inaccessible to beginners and average users.
Hardware wallets
A hardware wallet is a safe and convenient way to keep your private keys offline. These devices look like smartcards or USB sticks that can be connected to your smartphone or computer using apps, allowing you to access your assets efficiently.
Since your private key never leaves the device, you don't have to worry about the risk of hacking. An ideal example of a hardware wallet is Tangem.
Hardware wallets are the way to go if you are looking for the safest and most reliable cold wallets. Learn more about hardware wallets here.
How does cold storage work?
Cold storage involves generating private keys offline through a secure process and storing them offline, away from internet-connected devices. Private keys are typically stored in physical forms like paper wallets, hardware wallets, or encrypted USB drives, ensuring they remain inaccessible to hackers or unauthorized users.
Access to cold storage is tightly controlled to prevent unauthorized access. Only the user should have access to the physical or digital storage media containing the private keys. This access control ensures the assets remain secure and protected from potential breaches.
When a transaction is required, the private key is retrieved from cold storage to sign the transaction offline. This offline-signing process adds an extra layer of security by preventing exposure to online threats. Once signed, the transaction can be broadcast to the network using an internet-connected device, ensuring seamless and secure asset management.
How to use a cold wallet?
A cold wallet is an excellent option to secure your Bitcoin and other cryptocurrencies. Here is a detailed guide to setting up and using a cold wallet.
1. Buy a hardware wallet
You can purchase a hardware wallet from an online retailer using your credit card or from nearby stores to get started. At Tangem, you can buy a hardware wallet with fiat and cryptocurrencies, including BTC, ETH, USDT, USDC, XRP, APE, SOL, TRX, MATIC, ADA, ALGO, LTC, Doge, BCH, Shiba Inu, DAI. Here's what you should know before buying a Tangem hardware wallet.
2. Set up your wallet
Once you've purchased the wallet, the next step is to set it up by following the instructions. You'll need to create an access code during the setup process. It's essential to write down the seed phrase provided and keep it in a secure location.
3. Import cryptocurrency
Once your hardware wallet is set up, you can import cryptocurrency by accessing the wallet's interface either through a desktop or mobile application provided by the manufacturer.
Next, you'll need to navigate to the section of the wallet app that allows you to import funds. This usually involves adding/enabling some tokens and networks. Then, select "receive" or "add funds" in the wallet interface.
Here, the wallet will generate a unique receiving address, which you will use to transfer your cryptocurrency from its current storage location, such as an exchange or another wallet.
Transfer cryptocurrency from the source to this address after getting the receiving address from your hardware wallet.
You can also import cryptocurrencies using a seed phrase.
Major differences between a cold wallet and a hot wallet
Hot wallets store their keys online, while cold wallets store them offline. The debate between hot and cold wallets is widespread among crypto enthusiasts, each with their preference for different reasons. Let's look at the various aspects that differentiate the two types of wallets.
Security
Cold wallets are considered more secure than hot wallets because they aren't prone to hacking and other risks due to not being connected to any online server.
In contrast, hot wallets store the private key online, making them vulnerable to attacks. Some hot wallets — like exchange wallets — are also custodial, leaving users with little control over their assets.
User experience
Hot wallets are more convenient than cold wallets for moving assets around as they often don't require extra steps for signing transactions. Using a cold wallet may require more technical knowledge, but it's a crucial step in securing your assets.
Compatibility
Regarding capacity, hot wallets are often preferred due to their compatibility with many networks and tokens, including recently launched cryptocurrencies. Integrating a new network or token into a cold wallet takes time. Therefore, most cold wallets don't support every cryptocurrency out there.
Find out more about these differences between hot and cold wallets here.
What are the pros and cons of crypto cold wallets?
Cryptocurrency cold wallets offer several advantages and disadvantages:
Pros of cold wallets
- Cold wallets store private keys offline, making them immune to online hacking and cyber threats. This significantly reduces the risk of unauthorized access and theft of funds.
- Users have full control over their private keys and funds stored in cold wallets. There's no reliance on third-party services, providing greater autonomy and security.
- Cold wallets are ideal for the long-term storage of cryptocurrencies. They offer a secure and reliable way to hold large amounts of digital assets for extended periods without the need for constant monitoring.
- Storing cryptocurrencies in cold wallets mitigates the risk of losing funds in case of a cryptocurrency exchange hack or insolvency. Funds stored offline are not affected by exchange-related issues.
Cons of cold wallets
- Accessing funds stored in cold wallets for transactions might require manual intervention, as private keys need to be retrieved from offline storage. This can be less convenient compared to hot wallets, especially for frequent traders.
- Cold wallets, particularly hardware wallets and paper wallets, are susceptible to physical damage, loss, or theft. If not properly backed up or stored securely, there's a risk of losing access to funds permanently.
- Setting up a cold wallet, especially a hardware wallet, may involve a learning curve. Users need to follow specific instructions for initialization, seed phrase generation, and safe storage of the wallet device.
Hardware wallets, one of the most popular types of cold wallets, come with a cost. While the investment in a hardware wallet is often justified by the enhanced security it provides, it can be a deterrent for some users, especially those with smaller cryptocurrency holdings.
Conclusion
The Tangem Wallet is an optimal cold wallet solution that effectively mitigates the limitations of traditional cold wallets. It provides a user-friendly interface that simplifies the process of accessing and managing funds stored offline. Its intuitive design and seamless integration with mobile devices offer convenient access to cryptocurrency holdings without compromising security.
Tangem Wallet is a monolithic plastic smart card, making it highly durable and resistant to physical tampering. This ensures secure storage of private keys and access to funds without worrying about damage or loss.
It's a streamlined and affordable solution to hardware wallets' complexity and cost issues. The app guides users through the setup process, and the wallet is equipped with robust security features, making it an ideal choice for cryptocurrency users.
FAQ
1. What exactly is a cold wallet?
A cold wallet, or cold storage wallet, is a secure method of storing cryptocurrencies offline. It involves keeping the private keys of your digital assets offline, away from internet-connected devices, and reducing the risk of unauthorized access by hackers.
2. How does a cold wallet differ from a hot wallet?
Cold wallets differ from hot wallets primarily in their connectivity to the internet. Hot wallets are connected to the internet, allowing for easier access and transactions, while cold wallets remain offline, providing enhanced security by reducing exposure to online threats.
3. What are the advantages of using a cold wallet?
Cold wallets offer several advantages, including enhanced security, protection against cyber threats, and control over private keys.
4. How can I set up a cold wallet?
Setting up a cold wallet involves the following steps:
- Choose a reputable cold wallet provider. Here's a guide on choosing a cold crypto wallet to buy.
- Generate your private keys: Follow the instructions provided by the wallet provider to generate your private keys securely.
- Ensure backup and recovery: Create backups of your private keys and implement a recovery plan in case of loss or damage to your cold wallet.
5. Can I use a cold wallet for all types of cryptocurrencies?
Yes, most cold wallets support many cryptocurrencies, including popular ones like Bitcoin, Ethereum, Litecoin, and others. However, checking compatibility with specific cryptocurrencies is essential before choosing a cold wallet solution
6. What precautions should I take when using a cold wallet?
To maximize security when using a cold wallet, consider the following precautions:
- Keep your private keys secure: Store your private keys in a safe and inaccessible location to prevent unauthorized access.
- Regularly update your wallet software: Keep your cold wallet software updated with the latest security patches and updates
- Verify transactions carefully: Double-check transaction details before confirming them to avoid potential errors or fraudulent activities.
Discover more tips on using a cold storage wallet.
7. Can I transfer funds between cold and hot wallets?
Yes, it is possible to transfer funds between a cold wallet and a hot wallet. However, following recommended security practices and ensuring that both wallets are properly secured is essential to minimize the risk of unauthorized access or loss of funds during the transfer process.