Cold Wallet: Everything to Know
By Beluga Research June 24, 2023
- Cold wallets are physical devices designed to store cryptocurrency private keys securely
- The offline storage utilized by cold wallets makes them less susceptible to online threats
- Cold wallets typically offer a backup and recovery mechanism to safeguard funds in case of loss, theft or damage to the wallet
- Cold wallets are not always everyone's first choice to store cryptocurrency, as they come with some risks and restrictions that are important to know
A cold wallet, also known as an "offline wallet," is a physical device that stores private keys for cryptocurrencies offline.
A cryptocurrency wallet stores private keys and public addresses, allowing users to send and receive digital assets. There are two main types of cryptocurrency wallets: "hot wallets" and "cold wallets." Hot wallets are connected to the internet and are generally more convenient for everyday use. However, they are also more vulnerable to hacking and theft. Cold wallets, on the other hand, are not connected to the internet and are therefore less susceptible to cyberattacks.
A Brief History
The first cryptocurrency, Bitcoin, was created in 2009. In the early days of Bitcoin, users stored digital assets on computers. However, this method of storage was not secure, and many users lost crypto due to hacks and theft. As the value of Bitcoin and other cryptocurrencies began to rise, the need for better security measures became apparent. In 2011, the first hardware wallet, the Trezor, was released. This device allowed users to store their private keys offline and provided an extra layer of security.
Since then, many other cold wallet options have emerged, including Ledger and KeepKey. These devices have become increasingly popular among cryptocurrency investors who want to protect their digital assets from theft and hacks.
What Is a Cold Wallet?
Cold wallets are often referred to as "air-gapped" because they are not connected to the internet. This makes them less vulnerable to hacking and theft. Cold wallets come in different forms, including "hardware wallets", "paper wallets" and even "brain wallets."
Hardware wallets are the most popular type of cold wallet. These devices are small, portable and easy to use. They usually connect to a computer or mobile device using a USB cable and require a PIN or passphrase to access the private keys. Hardware wallets use a secure element, which is a tamper-resistant chip that stores the private keys. This makes it almost impossible for hackers to steal the private keys.
Paper wallets are another type of cold wallet. These are simply a piece of paper that contains private keys. Paper wallets are not as secure as hardware wallets because they can be lost, damaged, or stolen. However, they are still a viable option for those who want to store their cryptocurrency offline.
Brain wallets are a type of cold wallet that use a passphrase to generate the private keys. This passphrase is something only the user knows, which makes it difficult for hackers to steal private keys. However, brain wallets are not recommended because they can be vulnerable to brute-force attacks - where a hacker tries as many combinations as possible to get access.
Cold wallets come in various forms, including paper wallets, hardware wallets, and even USB drives. The process of setting up a cold wallet is relatively simple. A user must simply choose a wallet provider, download the necessary software, and create a wallet address. Once this wallet is created, the user can transfer digital assets from an exchange or hot wallet to a cold wallet.
One of the unique aspects of cold wallets is their security. Because they are not connected to the internet, they are less vulnerable to hacking attempts. This makes them a popular choice among investors who hold large amounts of cryptocurrency. Another unique aspect of cold wallets is their durability. Unlike hot wallets, which are often made of plastic or other materials that can be easily damaged, cold wallets are often made of metal or other sturdy materials that can withstand physical damage. This means that users' digital assets are less likely to be lost due to physical damage.
Additionally, cold wallets are often compatible with multiple cryptocurrencies. This means that users can store multiple digital assets in a single wallet, making it easier to manage their portfolios.
- Security . One of the primary advantages of using a cold wallet is the security it provides. Cold wallets are not connected to the internet, which makes them less vulnerable to hacking and other cyber threats. This means that even if a hacker gains access to a user's computer or mobile device, they will not be able to steal their cryptocurrency if it is stored in a cold wallet.
- Offline Storage . Cold wallets provide offline storage for cryptocurrency. This means that a user's cryptocurrency is not vulnerable to online attacks or malware that could compromise their computer or mobile device.
- User Control. With a cold wallet, users have complete control over cryptocurrency. Users do not need to rely on a third-party service to store cryptocurrency, which means that they are not at the mercy of specifc security protocols or other policies.
- Multi-Currency Support . Many cold wallets support multiple cryptocurrencies, which makes them a convenient option for people who hold a diverse portfolio of digital assets.
- Backups . Cold wallets often come with backup options that allow users to recover their cryptocurrency in case a wallet is lost or stolen. This can provide peace of mind and ensure that the cryptocurrency is not lost forever.
- Cost . One of the primary disadvantages of using a cold wallet is the cost. Cold wallets can be expensive, with prices ranging from $50 to $200 or more. This can be a significant investment for some people, especially those who are just starting out with cryptocurrency.
- User Error . Another potential disadvantage of using a cold wallet is user error. If a user loses their cold wallet or forgets their password, they may not be able to recover their cryptocurrency. It is important to keep cold wallets in a safe place and to remember the associated passwords or recovery phrases.
- Convenience . Cold wallets are less convenient than online wallets, which can be accessed from anywhere with an internet connection. With a cold wallet, users must physically connect the device to a computer or mobile device in order to access their cryptocurrency.
- Learning Curve . Cold wallets can have a bit of a learning curve, especially for people who are not familiar with cryptocurrency or technology in general. It can take some time to learn how to set up and use a cold wallet properly.