What is a Cold Wallet?

What is a Cold Wallet?

A cold wallet is a crypto wallet that stores cryptocurrency’s private keys offline. Since private keys are stored offline, cold wallets are more immune to cyber attacks. In cold wallets, the private keys are transferred from the device with an internet connection to an offline device.

Authorities, businesses, governments, and established companies often use cold wallets to protect their digital assets to prevent threats and risks. Thus, most popular crypto exchanges and crypto wallets offer cold wallet options catering to the evolving needs of modern crypto users.

With rising scams and threats in the crypto industry, such as viruses, ransomware, malware, etc., even regular crypto users nowadays prefer cold wallets over hot wallets.

Features of Cold Wallet

Understanding the key features of cold wallets will help you decide whether they are suitable for you. Here are some of the key features of cold wallets.

• Cold wallets are offline and are not connected to the internet.
• Cold wallets often use robust encryption methods with multiple authentication processes to access crypto assets.
• Cold wallets are extra secure as they use specialized chips to store cryptographic keys, preventing hackers from gaining access to the assets.
• Cold wallets offer backup and recovery methods, such as seed phrases, to restore access to crypto assets in case of a lost or damaged physical wallet.
• Cold wallets can create private keys in offline mode, ensuring that the keys are not exposed to internet-connected devices.

How does Cold Wallets Work?

Let’s first understand why cold wallets are more secure than hot wallets. Private keys stored in a device connected to the internet (hot wallets) are prone to risk. Hackers and cyber attackers try to steal private keys from online devices because they can hack and alter an internet-connected device.

Cold wallets minimize the chances of private keys being stolen as they are not connected to the internet. Thus, they are more secure than hot wallets. Moreover, transferring private keys to cold wallets is straightforward.

Now, how do these cold wallets work? Private keys in cold wallets are generated offline by a computer or hardware device, which produces a random number. The generated private keys are then stored in the chip or any physical device, like a printed QR code or alphanumeric string.

All of these security measures prevent any unauthorized access to cold wallets. Cold wallets often implement various access control systems like PIN codes, access codes, passphrases, biometric authentication, etc, to prevent unauthorized access.

The private key is retrieved from cold storage offline during the transaction. The offline sign-in process ensures an extra layer of security from online threats. Once the transaction is complete, it is broadcast to the network via an internet-connected device. Thus, cold wallets are more secure and seamless to manage.

Types of Cold Wallet

Cold wallets are in various forms, offering varied levels of security and functionality. Learning about these different types of cold wallets will let you choose the best solution for storing your crypto assets.

1. Hardware Wallets

Hardware wallets are portable physical devices that generate and store private keys offline. They are specifically designed to store cryptocurrency’s private keys. Some popular examples of hardware wallets include Ledger, Trezor, Bitkey, and more.

Hardware wallets often have a typical user interface, like a screen with options to perform transactions. Users should enter a PIN to confirm transactions. You can equate it to an ATM.

Some hardware wallets work like USBs, which you can connect directly to a computer. Now, modern hardware wallets come with a camera and are designed to read QR codes. Scanning QR codes is the safest option compared to connecting USBs.

Users can get these hardware wallets from retailers. Most of these wallets are waterproof and antivirus. They support multi-signature to validate transactions, requiring more than one user to approve transactions by entering private keys.

2. Offline Software Wallets

Offline software wallets are another popular form of cold wallets that are not connected to the internet. These wallets also create and store private keys offline, ensuring data security.

It works similarly to hot wallets but it demands more technical knowledge to set up and utilize securely. Hence, offline software wallets are ideal for advanced users. Some examples of offline software wallets are Electrum and Armory.

Users should create transactions online on their personal computers and transfer them offline via a USB drive or QR code. After that, you need to sign in with your private keys and move the fully signed transactions back to your personal computer via USB or QR codes.

The computer then broadcasts the transactions. The entire process may sound cumbersome but it assures a secure transaction. However, these offline cold wallets are not ideal if you want to do frequent transactions.

3. Paper Wallets

Paper wallets are the most common form of cold storage as they are pretty straightforward and inexpensive. For instance, in Bitcoin paper wallets, you can simply print the document with a printer.

You can also use a QR code generator and get it printed and scanned to initiate transactions. However, this may pose a risk of theft as the keys are exposed to more software.

Moreover, if the paper wallet is lost or destroyed, you can’t access your crypto assets. Hence, if you want to use paper wallets, ensure you have a safe storage method and also make backups.

4. Deep Cold Storage

Deep cold storage refers to any method that is challenging and demands more time and effort to retrieve private keys. It can be anything from placing your hardware wallet in a safe and burying it in your backyard or hiring a third party to store your private keys in a vault with multiple authentications.

In short, storing crypt assets in deep cold storage means, storing them in a storage place offline that is very difficult to find. It can be burying in the backyard or storing your private keys in an ultra-secure vault.

5. Sound Wallets

Sound wallets are a pretty expensive way to store and access your private keys. For instance, sound wallets involve encrypting and recording the private keys in sound files on CDs or USB drives. The private key code stored as sound files can be deciphered with a spectroscope.

Pros and Cons of Cold Wallet

The cold wallet has its own pros and cons.

Pros

• Cold wallets store private keys offline, preventing potential hacking, cyber threats, theft, and unauthorized access.
• Users need not rely on third-party services as they have full control over their private keys stored in cold wallets.
• Cold wallets are best suitable for long-term storage. Users can rely on cold wallets for storing large amounts of digital wallets for long periods.

Cons

• It can be time-consuming to retrieve the private keys from cold wallets and access funds. Hence it can not be convenient for frequent traders.
• Cold wallets can be prone to physical damage, loss, or theft.
• Setting up a cold wallet often demands a learning curve.
• Cold wallets can be expensive.