Security is one of the most important things in the world of cryptocurrency. This is because digital tokens are very prone to hacks and security breaches, hence, every crypto user has to store their digital token in a wallet that protects against these violations. Currently, the cold storage wallet is arguably the safest type of wallet for your digital coins, especially if you want to protect your assets offline.
In this article, we explored cold storage wallets, how they work and the advantages they provide.
What is a cold storage wallet?
A cold wallet is a kind of crypto wallet that can securely hold your private crypto keys offline, typically on a physical device. This wallet is also called a hardware wallet, and it helps to protect all your digital crypto tokens from online hackers via a flash drive-like device, which isn’t connected to the internet. Essentially, cold wallets are a unique form of cold storage and are used to guarantee the safety and security of cryptocurrency assets.
How does a cold wallet work?
When you purchase cryptocurrency, the transaction is usually recorded on a blockchain. The blockchain is a ledger of transactions where all crypto transactions are recorded. If the blockchain is made public, you can easily access it as long as you are connected to the internet. Generally, blockchains are hosted and held by a decentralized network of computers. This means there’s no single person or entity hosting the ledger, as it is shared.
To gain access to your cryptocurrency, you require both a public and private key. While the public key can be shared with everyone, the private key is only to be known by you for security purposes and to protect your crypto holdings. A cold wallet safely stores your private key in some sort of smart memory stick. If you want to access your crypto keys, you can just connect via Bluetooth or USB (depending on the variety of cold wallets you use), and simply use your cold wallet’s desktop or mobile app to easily access your funds.
Generally, cold wallets are protected by a password. For instance, Ledger, which creates some of the most notable cold wallets, needs a unique 4- to 8-digit PIN code.
Can a cold wallet be hacked?
Yes, cold wallets can still be hacked. Even though this kind of wallet obviously cannot be hacked or breached remotely, if your cold wallet device gets stolen, it can get really complicated.
For instance, if your PIN gets stolen alongside your cold wallet, anybody can easily access your crypto assets. Nevertheless, even if you protect your PIN, a hacker can use numerous techniques to attempt to access your wallet. Some of these techniques include flooding the power supply to amass raw data by overloading the cold wallet device, or by manipulating information leaked from the distinct voltage outputs as it performs a transaction.
Although many digital wallets have solid built-in protection to defend themselves from these kinds of attacks, it’s still very important to be mindful of the possibilities.
Lastly, anybody can easily steal your crypto assets without your cold wallet by making use of your seed phrase. A seed phrase is a unique set of randomly generated phrases or words that are used to restore or recover access to a user’s cryptocurrency wallet. If somebody figures out your seed phrase, they can easily generate an entirely new private key and access your crypto assets.
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What happens if you lose a cold wallet?
Cold wallets are generally protected by a password and still have other safety features that help to protect your data if someone steals your wallet. For example, three inaccurate PIN entries will trigger a factory reset for all Ledger devices. However, a stolen cold wallet can complicate things, just like we discussed above.
Fortunately, your crypto tokens can’t be stolen from your crypto wallet, since it is not stored in your wallet. Only your private keys are stored in your wallet, while your cryptocurrency is stored on the blockchain. As long as you can remember your seed phrase, you can easily access your assets by generating a new key.
What are the Types of cold wallets?
Below, we’ve provided a list of the different types of cold wallets:
1. Paper wallets
This is the most fundamental form of cold storage. Essentially, a paper wallet is just a document that has both public and private keys, which are written on it. As for a Bitcoin paper wallet, the Bitcoin holder just has to print the document directly from the Bitcoin paper-wallet device online using an offline printer.
Usually, the crypto paper wallet has a Quick response (QR) code embedded in it that makes it easy for it to get scanned and signed to execute a transaction.
The disadvantage of the paper medium is the paper itself. If the paper gets lost, caused illegible, or destroyed, the crypto user will be unable to access the address where their crypto assets are. If you decide to go for this type of wallet, ensure that you have a safe box or any other secure storage method to keep the paper wallet itself.
2. Hardware wallets
Hardware wallets are another form of cold storage that makes use of an offline tool or smart card to generate crypto private keys offline. A good example of a hardware cold wallet that uses a smart card to safeguard private keys is the Ledger USB wallet. Other popular examples of this kind of wallet are KeepKey and TREZOR.
Just like the paper wallet, it is important to properly store this USB device and smart card in a very safe place. Any loss or damage to this device can terminate access to your Bitcoins.
3. Sound wallets
Sound wallets are a hidden and costly way to store your private keys, depending on your preferred storage medium. Essentially, this kind of wallet involves encrypting and recording your private crypto keys in sound files. This file will be stored on products like CDs or vinyl disks (records). The recorded code hidden in these audio files can easily be deciphered by using either a high-resolution spectroscope or a spectroscope application.
4. Deep cold storage
Note that putting your hardware wallet in your safe box is secure but it isn’t regarded as deep cold wallet storage because it is still very easy for you to access.
Essentially, deep cold storage is any technique that is extremely inconvenient and needs time and effort to recover your keys. This can be anything from employing a third-party service that helps to store your crypto private keys in a vault that is difficult to access to putting your hardware wallet inside a waterproof container and burying it six feet below. As long as your wallet becomes difficult to access, it can be regarded as a deep cold storage.
Nevertheless, the two kinds of deep storage listed above have their drawbacks. Burying your private keys six feet deep will involve lots of digging and remembering the exact spot you buried them. As for the third-party ultra-secure vault service, they need your identity, proof of address, or any other valid means of identification before you can access your keys. Also, it can take a long time to get to your keys, depending on where the service physically stored them.
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5. Offline software wallets
Lastly, we have offline software wallets, which are fairly similar to hardware wallets, but more complex than them. Offline software wallets divide a wallet into two different accessible platforms—an online wallet that stores the public keys and an offline wallet that holds the private keys. Essentially, the online wallet develops new, unsigned transactions and transmits the user’s address to the sender or receiver on the other side of the transaction. Thereafter, the signed transaction is transmitted directly to the online wallet, which then broadcasts it to the network. Since the offline wallet is never connected to the internet, its stored keys remain protected and secure.
Is cold storage best for cryptocurrency?
Yes, cold storage is regarded as the best for your crypto assets because it removes your crypto private keys from the internet, where it is easily accessible by anyone. Since this storage is offline and denies people access to your keys, it is currently the best technique for storing your crypto private keys.
Is cold wallet the safest way to store crypto assets?
Yes, cold wallets are regarded as the best type of wallets because they are not connected to the internet. Hence, they hold much less risk of being hacked or compromised.
What Happens When You Put Cryptocurrency in Cold Storage?
When you put your private keys in cold storage, they are simply removed from your wallet. You can still see your digital assets in your wallet because the ownership is still stored on the blockchain. However, you cannot use your assets until you transfer the private keys you want to use directly into your wallet
Cold vs. hot storage for Crypto – A direct comparison
There are numerous ways of storing crypto assets. Besides cold storage which has already been discussed, another popular storage method is called “hot storage.” Basically, hot wallets are those types of wallets that are constantly connected to the internet. They include wallet apps and some other wallets offered by numerous cryptocurrency exchanges. Here is a list of some glaring differences between hot and cold crypto wallets:
1. Cost
When speaking about cost, hot wallets generally win over cold wallets because they come cheap. In fact, hot wallets are free for users. Cold wallet choices range from absolutely free as well (for paper wallets) to as high as $100 to $200 for different types of physical hardware wallets.
2. Security
The biggest advantage that cold wallets have over hot wallets is security. Although hot wallets are highly secure because of their various cryptographic protections, they still cannot compare with the solid security of cold wallets.
3. User experience
Hot wallets are generally more convenient for users than cold wallets because they are connected to the internet. Hence, users don’t need to go through the stress of connecting the hot wallet online before they can facilitate a transfer of digital tokens.
Although cold storage wallets are the best for storing your digital assets, they are more expensive than hot storage wallets. Nevertheless, many users with tangible crypto assets still prefer to use them because of the solid security they provide. Remember to ensure that the digital wallet you choose is compatible with the digital coins you transact with, as not all digital wallets are compatible with all cryptocurrencies.
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