Did you know that cold storage is considered one of the most secure ways to hold cryptocurrency? In fact, a 2022 survey found that nearly 60% of crypto users who hold assets long-term use cold wallets to secure their funds, reflecting growing concerns about online hacks and exchange vulnerabilities.
According to another 2023 report, more than $3 billion worth of cryptocurrency has been stolen from hot wallets on exchanges since 2011, prompting a significant rise in the adoption of cold storage wallets.
So, in this article, we’ll explore everything you need to know about cold storage wallets
What is a cold storage wallet?
A cold storage wallet, also known as an offline wallet or cold wallet, is a tool for managing and storing cryptocurrency offline for security purposes. It keeps the private keys associated with your cryptocurrencies in a secure environment that is not connected to the internet, reducing the risk of hacking or remote unauthorized access.
How do cold storage wallets work?
We’ve established that cold storage wallets store cryptocurrency offline, keeping it away from the internet and minimizing the risk of hacking, but how do they work?
Cold wallets generate and store private keys offline, usually in a hardware wallet, paper wallet, or air-gapped computer. Key generation involves creating a public-private key pair that secures digital assets. A random number is created using a random number generator, which serves as the foundation for generating the private key, a long string of alphanumeric characters. This key allows access to your crypto, but it must be kept secret.
Using cryptographic algorithms (such as elliptic curve cryptography in Bitcoin), the private key generates a corresponding public key. The public key is hashed through additional algorithms (e.g., SHA-256 and RIPEMD-160) to create the wallet address, a shorter, user-friendly representation for receiving funds.
Transactions are created on an online device but signed with the private key on the offline wallet. The signed transaction is then sent back online via Bluetooth, NFC, or QR codes to broadcast to the blockchain.
Is a hardware wallet cold storage?
A hardware wallet is a form of cold storage. Hardware wallets are physical devices specifically designed to store private keys securely offline. They offer a good balance between security and convenience, as they can be easily connected to a computer or smartphone but remain offline and secure when signing transactions.
What is the difference between a hot wallet and cold storage?
Let’s compare the differences in the table below:
How to make a cold storage wallet for crypto offline
To create an offline Bitcoin address with a highly secure paper wallet, follow these two steps:
- First, create a "public/private key pair" offline. Think of the key pair as an email address and its corresponding password. This key pair must never be exposed to the internet. To set up your cold storage paper wallet, you'll need to save the webpage that generates the keys, disconnect your device from the internet, open the saved webpage on your desktop, and then generate the keys. You can use specific wallet-generating tools for Bitcoin (BTC) and Bitcoin Cash (BCH).
- The next step is to make an offline copy. You'll need the public key (the address) to load your wallet with Bitcoin and the private key to sign transactions. Print out the public/private key pair to make an offline copy. You could also write the key pair on a piece of paper. Ensure your printer and computer are disconnected from the internet before hitting the print button.
Close the webpage and safely reconnect to the internet. Ensure the printed page contains the public Bitcoin address in alphanumeric and QR code form and the corresponding private key. If you plan on keeping a lot of value in this wallet, the best option is to store the paper wallet somewhere secure, such as a fireproof safe.
Otherwise, you could purchase a hardware wallet like Tangem, Ledger Nano X, or Trezor. You can find them on wallets on the manufacturers' official websites or authorized resellers.
How to set up a cold storage wallet
- Purchase a hardware wallet like Tangem Wallet.
- Follow the device’s instructions to generate private keys and set up a secure passphrase.
- Write down the seed phrase for backup (never store it digitally).
- Install the necessary software or app to manage your assets and complete transactions.
- Transfer your cryptocurrency from a hot wallet to your cold wallet.
Learn more about setting up your Tangem Wallet here.
How to use a cold storage wallet
Using a cold wallet to store your cryptocurrency is more secure but comes with some challenges. Here's what you need to know to manage your funds effectively:
Managing balances and transaction fees
Cold storage wallets are often self-custodial, so you must be careful about managing your balances.
You should always deposit or keep enough native coins to cover future transaction fees.
Let's assume you use a Tangem Wallet to receive your wages or salary in Tether (USDT) on the Ethereum network. You must deposit enough Ether (ETH) in this wallet to use your salary for other transactions.
If you're depositing Bitcoin in a cold wallet, get ready to lose some BTC as part of network fees for transactions you'll make. Different blockchains have different fee structures, so you must plan ahead and ensure enough balance to cover the fees.
Sending and receiving on the right network
When using a cold wallet, you must choose the correct network when sending or receiving tokens. Each cryptocurrency exists on a specific blockchain network, and using the wrong one can result in losing funds.
For example, if you send Tether from a cold storage wallet to a Binance wallet on the wrong network, you cannot recover the tokens. Many tokens are issued on multiple networks, so you need to ensure you're interacting with the correct version of the token and select the right network in your cold wallet's interface.
Your wallet's security also depends on keeping the private keys or seed phrases safe. If you lose them, you won't be able to recover your funds. If someone else sees them, they could steal everything you own. Store the seed phrase offline in a secure physical location. Always handle your hardware wallet device with care.
Is there a cold storage wallet for all tokens?
Most cold storage wallets support various cryptocurrencies, including like Bitcoin, Ethereum, and many altcoins. For example, Tangem Wallet supports over 13000 cryptocurrencies. However, you have to verify that your chosen wallet supports all the tokens you want to manage.
What is the benefit of hardware wallets over USB cold storage?
Hardware wallets like Tangem are purpose-built for cryptocurrency security. Unlike a regular USB drive, which lacks encryption or private key protection, these wallets offer advanced security features, including PIN protection, recovery seed phrases, and secure element chips designed to prevent invasive and non-invasive hacking attempts.
What is the best cold storage wallet for cryptocurrency?
The best cold storage wallet depends on your specific needs. Some popular and secure choices include Tangem Wallet, Ledger, Trezor, Ngrave. Each of these options supports a variety of tokens and comes with their own unique features. As always, we recommend Tangem as the best cold storage wallet because we built it ourselves, and its spotless record proves its security. Learn more about why you should get a Tangem Wallet.
What happens if you lose your cold storage wallet?
When you lose your cold storage wallet, your funds can still be recovered if you have securely backed up your recovery phrase. You can use this phrase to restore your wallet and access your funds on a new device. If the seed phrase is lost along with the wallet, the funds are irretrievable. Tangem Wallet comes with two or three devices for backups. This approach gives our users peace of mind that they always have a spare wallet at home or in a vault.
Frequently Asked Questions
What is a cold storage crypto wallet?
A cold storage crypto wallet stores private keys offline to protect against online threats and hacking attempts.
What cold storage wallet supports XDC, SOL, KAS?
Tangem Wallets and other multi-currency hardware wallets are known to support XDC and other tokens. Check with the specific manufacturer for compatibility.
How does a cold storage wallet work?
A cold storage wallet keeps private keys offline. When you need to send cryptocurrency, the wallet signs the transaction offline before it is broadcast to the blockchain.
What happens if your cold storage wallet breaks?
If your cold storage wallet breaks, you can recover your funds using the recovery seed phrase on a new wallet.
Where can I buy a cold storage wallet?
You can buy cold storage wallets from official websites or authorized retailers.
What if my cold storage wallet doesn’t support my crypto?
If your wallet doesn’t support a particular crypto, you’ll need to store it in a supported wallet, either online or offline.
Do I need a cold storage wallet?
A cold storage wallet is essential for anyone holding a significant amount of cryptocurrency for long-term investment, offering enhanced security.
How many cryptocurrency exchanges offer offline cold wallet storage?
Many exchanges, such as Crypto.com, Coinbase, and Bittrex, offer offline cold wallet storage to safeguard the bulk of user funds. These platforms use cold storage to store most assets offline while keeping a small amount of cryptocurrency in hot wallets for liquidity and everyday transactions.
Do I need a hardware wallet for cold storage?
While there are other forms of cold storage, a hardware wallet is the most secure and user-friendly method for most people.
Is transferring to a cold storage wallet considered selling?
No, moving crypto to a cold wallet is simply transferring it for storage, not selling it.