What is a cold wallet? Cold wallets are a way to store cryptocurrency and protect digital assets from theft. We will take you to understand the basic differences between cold wallets and hot wallets, tell you all about cold wallets, and introduce the types of hardware wallets, recommended use times, operating principles, and advantages and disadvantages.
What is a cold wallet?
Cold wallets (English: Cold wallets) are a way to store cryptocurrency. The biggest feature is that they are not connected to the Internet when used, which can avoid common online security vulnerabilities such as hacker attacks.
A cold wallet does not have to be a hardware device, it may also be a non-hardware form such as a paper wallet. Paper wallets, as the name suggests, are a piece of paper printed with the user's private key for cryptocurrency transfer. It can be handwritten, printed, or displayed with a QR code.
Simply put, a cold wallet is a hardware cryptocurrency wallet that simply stores assets. Cold wallets allow users to query their cryptocurrency assets and perform transfers from other wallets without interacting with any smart contracts or external resources.
Most threats of cryptocurrency theft come from the Internet, and cold wallets are not connected to the Internet, so they can stay away from digital threats and prevent assets from being stolen. Generally, cold wallets are password protected, such as Ledger, the most popular cold wallet brand, which requires a 4- to 8-digit PIN to open the wallet.
When is it recommended to use cold wallets?
Cryptocurrencies are currencies recorded on the blockchain. Even though the blockchain itself is secure as a decentralized ledger, the wallets used to manage assets are vulnerable to cyber attacks. Therefore, using cold wallets can provide an extra layer of protection to ensure that cryptocurrencies are not threatened by cybercrime.
Compared with hot wallets, the main difference between the two is that hot wallets are connected to the Internet, while cold wallets are not. This means that cold wallets protect against unauthorized access, network attacks, and other network-connected system vulnerabilities.
If you want to ask, under what circumstances would it be recommended to use a cold wallet? The principle of using cold wallets is usually: when the amount of cryptocurrency you own is large enough, or you cannot afford to lose the cryptocurrency you own, you should use a cold wallet.
If you don’t hold much cryptocurrency, there is no need to use a cold wallet, but if you have a large amount of cryptocurrency, storing it in a hot wallet connected to the Internet is like carrying a large amount of cash among people, which is very uncomfortable. Safety.
In terms of cost, cold wallets are more expensive than hot wallets (the price of cold wallets on the market falls between $79 and $255), whereas most hot wallets are free. And in terms of convenience of use, cold wallets require a specific password or method to access each time they are used, so the operation of cold wallets will be more cumbersome than hot wallets during transactions.
Despite this, many people are willing to choose cold wallets for the security.
Cold wallets vs. hot wallets: Which cryptocurrency wallet is better?
Hot wallets and cold wallets are both primary methods for storing and exchanging cryptocurrencies. A hot wallet is a software wallet that allows users to store public and private keys in an online environment and operate them directly through a computer or mobile phone; but a cold wallet stores assets in hardware that is not connected to the Internet. device, providing greater security.
How to choose the right wallet? The answer varies from person to person. You should understand how to combine the characteristics of cold wallets and hot wallets and find a balance between the "ease of use" of hot wallets and the "security" of cold wallets.
Therefore, we compare the characteristics, advantages and disadvantages of cold wallets and hot wallets and present them in the following table
Cold Wallet Hot Wallet Definition Offline wallet, stored on a device not connected to the Internet, such as a hardware wallet or paper wallet.
A wallet connected to the Internet, usually in the form of software such as a computer, mobile phone or online platform.
Security Higher security, reducing the risk of hacker attacks.
Because of the Internet, you may be attacked by hackers. Its security is related to the user's Internet security habits, the software used, and the security of the computer or mobile phone.
Convenience The transaction speed is slow and requires hardware equipment to operate. If you need to do frequent transactions, it is less convenient.
As long as you are connected to the Internet, you can trade anytime and anywhere. Convenient for frequent or quick transactions.
Usage scenarios: It is suitable for users who store large amounts of cryptocurrency for a long time and do not need to trade frequently, such as long-term investors and savers.
Suitable for users who need to conduct transactions frequently or quickly, such as short-term traders, users who want to use cryptocurrencies for shopping or payment services.
Why are cold wallets safer?
The private key is the key to accessing the encrypted assets in the wallet. When the private key is connected to the Internet, it is vulnerable to the threat of cyber theft. Cold wallets maintain the security of assets by staying offline and signing transactions.
In other words, storing cryptocurrencies in cold wallets away from the Internet can protect assets from hackers, malware, and other online security threats. Therefore, cold wallets are often regarded as the best way to protect crypto assets from being stolen.
It’s worth noting that while cold wallets can provide a high level of security, they are more likely to be lost or damaged. Therefore, it is also very important to protect the cold wallet.
What are the types of cold wallets?
Cold wallets come in different forms and sizes. Due to their offline usage environment, they can all play the basic role of preventing digital assets from being stolen online.
However, cold wallets can still be divided into the following types due to different storage forms:
Paper wallets: Print the private and public keys of cryptocurrency in paper form and keep them properly. However, paper wallets also come with some risks, such as the possibility of loss or physical damage (such as moisture, fire, etc.). In addition, the private key must be manually entered every time a transaction is made, which increases the user's burden.
Hardware wallets: Physical devices designed for storing cryptocurrency, usually in the form of a USB or card. Not only does it store the private key in portable hardware offline, it often also comes with a PIN code, providing extra protection and is considered the best security option. If the device is damaged or lost, users can restore it by backing up the seed key. The price is usually not cheap.
Sound wallets: A special and more expensive storage method. Encrypt the private key and record it into an audio file and store it on a product such as a CD or vinyl record. The codes hidden in these audio files can be decrypted by using a spectrum analyzer application or device.
Deep cold storage: Store cryptocurrencies in devices that are completely disconnected from the network, such as burying private keys underground, or dispersing private keys in different safe deposit box services to provide the highest level of security sex. This method is usually used by financial institutions or users with extremely high security requirements.
Offline software wallets: Similar to hardware wallets, but much more complex. Offline software wallets divide a wallet into an offline wallet that contains private keys, and an online wallet that stores public keys. Each time a transaction is made, a new unsigned transaction will be generated by the online wallet, and the user's address will be sent to the payee or payer at the other end of the transaction. The unsigned transaction will then be moved to the offline wallet to access the private key. sign.
Finally, the signed transaction is moved back to the online wallet. Since offline wallets are never connected to the Internet, private keys remain safe. Examples of offline software wallets include Electrum and Armory.
We have organized the different cold wallet types in the table below. You can compare the advantages and disadvantages to find the cold wallet type that suits you best:
Cold wallet types Description Advantages Disadvantages Paper wallet
A document with a public and private key printed on it and an embedded QR code to allow for cryptographic transactions.
1. Carry it with you at all times. 2. No internet required.
1. If the file is damaged, it cannot be used. 2. Risk of damage or loss. Hardware wallet
An offline device used to store private and public keys, usually in the form of a USB or card.
1. Provide the best security protection. 2. Can store multiple cryptocurrencies.
1. The cost is relatively high. 2. If lost or damaged, recovery can be complicated. sound wallet
Innovative technology that uses sound to transmit cryptocurrency. Convert private and public keys into sound signals.
1. The use of sound transmission is very novel. 2. No internet required. 1. The technology is relatively new and uncertain. 2. Special equipment or software is required to decode audio signals. Deep cold storage
Take extra steps to make your wallet more inaccessible. Similar to placing a cold wallet in a bank safe deposit box.
1. Provide extremely high security. 2. Especially suitable for large or long-term storage of cryptocurrency. 1. It is quite troublesome to deposit and withdraw. 2. Requires additional time and resources to set up and maintain. Offline software wallet
The wallet is divided into two platforms, one is an offline wallet containing private keys, and the other is an online wallet that stores public keys.
1. Combine the advantages of online and offline wallets. 2. Since the offline part is not connected to the Internet, the private key remains safe.
1. It is more complicated to set up and use. 2. The software needs to be updated regularly to maintain its security.
In short, cryptocurrency cold wallets provide a solid protective barrier for our digital assets. While it may not be as convenient as a hot wallet, for those who take security extremely seriously, it is undoubtedly the best option for protecting their cryptocurrency assets.
So, are you ready to put your cryptocurrencies into a cold wallet?
Frequently asked questions and answers about cold wallets
Are cold wallets the best way to store cryptocurrencies?
According to a report by Forbes Adviser, Samira Tollo, chief technology officer and co-founder of Elbaite, an Australian cryptocurrency exchange, said that in recent years, the virtual trading market has been experiencing constant turmoil, such as the FTX bankruptcy, and investors have become increasingly aware of the importance of self-custody. She suggested that if the amount of cryptocurrency is large enough or the assets are not frequently needed, it is best to use a cold wallet.
On the other hand, if you frequently conduct short-term transactions and speed may be more important than security, use a hot wallet. (Forbes Adviser suggests that although cold wallets are safer, they are less convenient to use in general transactions than hot wallets. In particular, users must take adequate precautions when setting up and using cold wallets. This ensures that private keys are not lost and that there is a way to recover their passwords in the unfortunate event that a hardware device is lost or damaged.
Are cold wallets necessarily safe? In fact, it still needs to be used with caution to achieve the best safety effect of cold storage. For example, you must properly protect your device by using strong passwords, keeping your device updated, etc. You must also avoid sharing your private keys with others or storing them online, and choose a reputable hardware wallet manufacturer. Also very important.
How are cryptocurrencies stored in cold wallets?
Assuming that the user has a hardware wallet, he must first connect it to a computer with Internet access. Next, select the option to receive cryptocurrency. An address will be generated. Send the cryptocurrency to this address and it can be stored in the user's account. In cold wallet; vice versa.
Cold wallets achieve security by using private keys to sign transactions in an offline environment. Therefore, after any transaction is initiated, it will be temporarily transferred to an offline wallet stored on a device such as a USB, CD, hard drive, paper, or offline computer, and then signed before being transferred online.
Since the private key does not come into contact with the online server during the signing process, even if the hacker discovers the transaction, he will not be able to access the private key used for the transaction.
When do you need to use a cold wallet?
There are two main reasons why we need cold wallets: high security and long-term storage.
First of all, hot wallets are connected to the Internet and are vulnerable to hacker attacks, while cold wallets are completely offline and accessed through hardware devices, reducing the possibility of digital assets being attacked by hackers.
Secondly, cold wallets are a method of long-term storage of assets, especially suitable for holders who do not frequently trade. Cold wallets are an ideal option if you need to protect certain cryptocurrencies for an extended period of time.
This article What is a cold wallet? How does it work? The most complete guide to cold wallets first appeared on Chain News ABMedia.
