Cold wallets are cryptocurrency and NFT storage solutions that give complete control to the individual user. Much like home based safes, cold wallets require proper safety procedures to be able to safeguard your cryptocurrency investments.
The greatest benefit is that Cold wallets provide excellent security and highest grade privacy to its users. However, they also need high diligence and attention. Further, there are many disadvantages too like hardware damage, loss of passwords, etc. We will help you evaluate cold wallets and help you decide whether they are the best solutions for your crypto storage or not.
Fun Fact: Wallets do not store your crypto or NFTs. Rather they store your private keys(passkeys). Your assets always exist on a blockchain.
What are Cold Wallets?
A cold wallet, sometimes called an offline wallet, hardware wallet, or even cold storage is a wallet that is not connected to the internet(also called air-gapped) and is used for storing cryptocurrencies and NFTs. This non-connectivity with the internet protects the wallet from unauthorized access, cyber hacks, and other vulnerabilities to which the system connected to the internet is susceptible.
This method of storing data is not only used by individual investors, but companies working in the crypto space including several cryptocurrency exchanges(e.g., KuCoin) use cold wallets to secure their assets. These companies are called as crypto custodial since they hold your crypto in their custody in exchange for a fee or as an additional service.
Cold wallets are mostly employed to secure cryptocurrencies and keep the holdings private. Therefore, a user of cold wallets must be aware of the underlying technology and its working process. Loss of access to a cold wallet can result in permanent loss of your digital assets.
We advise that before you decide to use cold wallets, you carefully go through the instruction manual provided with your device.
The fact that the storage is offline makes cold storage excellent security for coins like Bitcoin and other altcoins. There is no chance that hackers or attackers can gain access to it without connecting to the internet. Consider cold wallets as small physical cryptocurrency storage, which you can carry anywhere. You can have your crypto along with you at any time.
How does cold storage work?
For cryptocurrency users, wallets perform features similar to physical wallets holding cash. However, these wallets have cryptocurrency keys, both public keys and private keys. These keys give access to your account on a blockchain. You have an account with every blockchain that you have interacted with. These accounts have just 2 identifiers:
Public Address, that you show others to receive crypto
Private Key, your passkeys to the blockchain account
What are Private Keys?
A Private Key is a string of cryptographic characters. They are necessary to complete cryptocurrency transfers. Each cryptocurrency transfer is signed by the sender of that transaction and is verified on the blockchain. Public Keys are similar to your Email IDs. They identify your address so that other users can send you crypto and NFTs. Sharing public address with others is completely safe. A person can have multiple addresses on a single blockchain. All addresses will have a key specific to them. Then, you need your private keys to resend that crypto.
It is absolutely important to keep your private keys secure because once the private key is stolen, hackers can access your cryptocurrencies from the address without authorization. Cold storage devices have passwords like regular mobile phones. Most devices offer a 12 or 24 word set of phrases that help you restore your password in case you have lost them. We advise you to keep them in a position where you can access them when you lose your password.
How Cold Wallets secure your private keys?
Cold storage resolves this issue by signing the transaction with the private keys in an offline environment. A cold wallet shouldn’t be able to communicate with any other electronic device unless it is plugged into it(usually through USB). Any transaction initiated online is temporarily transferred to an offline wallet kept on a device such as a USB, CD, Hard drive, paper, or an offline computer. The added security of the cold wallet makes it more burdensome to use than the hot wallet. However, they provide you with the highest level of control among any wallet.
For instance, if you have your tokens on the hardware wallet, and you want to receive new tokens and initiate the transaction, your process might look like this :
Connect your hardware wallet to an internet-enabled computer
Select the option to obtain tokens. Your device will generate an address to facilitate the transaction
The sender initiates the transfer to the address generated above
Disconnect your hardware wallet, which contains public and private keys, and the information remains offline
Types of Cold Wallets
There are many types of cold wallets available that companies and individuals use to secure their cryptocurrencies. It includes a paper wallet, hardware wallet, sound wallet, deep storage wallet, and offline software wallets, to name a few.
Paper wallet:
This is the most basic form of cold storage. A paper wallet is a document with public and private keys. In the case of a bitcoin paper wallet, a bitcoin holder can print the copy from the bitcoin paper wallet tool with an offline printer. Paper wallets have QR codes attached, so one can make transactions easily by scanning them. The major drawback of using this wallet is that if the paper is lost or destroyed for some reason, the user will never have access to their address and will never be able to know about their cryptocurrencies. So it’s vital to have a safe place to keep your paper wallet.
Hardware Wallet
This is a widely used form of cold storage that uses an offline device or smartcard to generate private keys offline. The device generally looks like a USB, and a computer and chrome-based app are required to store the private keys offline. Like paper wallets, keeping this USB device secure is essential, as any damage to the device could terminate access to the user’s coins. Ledger USB Wallet is a type of hardware wallet that uses a smartcard to secure private keys. Few other examples include TREZOR and KeepKey.
Sound Wallet
Sound Wallets are an expensive way to store your data. They involve encrypting and decrypting your private keys in sound files on products like compact disks (CD).
Is a Cold Wallet better than a Hot Wallet?
Since cold wallets secure private keys in offline mode and are less vulnerable to attacks, they are considered better and more secure than hot wallets. But there are also other things to consider.
If you are worried about keeping track of your offline wallet, then hot wallets might be the right choice. Also, hot wallets are more user-friendly and provide easy ways to transfer your holdings across exchanges.
If you have investments worth a hundred dollars, you can keep them in your hot wallets. But, having an investment portfolio worth thousands of dollars, you would prefer more secure wallets.
Advantages of Cold Wallets
Cold wallets have several advantages over other crypto storage solutions such as hot wallets. However, you need to have good crypto knowledge and experience to be able to use them to their best capability.
Some of the top advantages are:
Security. Cold Wallets are secure as they store your private keys offline and allow very safe interaction between the hardware device(wallet) and the cold wallet app.
Privacy. It is almost impossible for any hacker to steal your crypto from your cold wallet.
Virus-Free. Cold wallets are safe from almost all computer, mobile and other kinds of viruses.
Disadvantages of Cold Wallets
Cold wallets are not so apt for users who are beginning their journey on cryptocurrency. You need to have a moderate knowledge about Web3, crypto and NFTs if you wish to efficiently use cold wallets. Check out our list of Top 10 Crypto, NFT and DeFi conferences which will definitely help you master Web3 knowledge.
A few drawbacks of cold wallets are:
You cannot restore account if you lose your private keys or passwords. Funds will be lost forever.
Any damage to the hardware can result in permanent loss.
You need moderate expertise in crypto.
Hardware Malfunction.
Top 5 Cold Wallets
If you have finally decided to buy a cold wallet, here is a few lines about top 5 cold wallets that you might consider as your crypto storage device.
1. Trezor Model T – $181
One of the most popular hardware wallets. The first Trezor Wallet was created by Satoshi Labs in 2014. Currently its most advanced wallet Trezor Model T is currently its most advanced model for customers. The Model T features a 1.54 inch touchscreen LCD screen and has USB-C connectivity. The Model T supports 1456 coins and tokens. It features seed phrase backup in case you lose your recovery phrase(also called seed phrase). The wallet also features direct buying, swapping and selling. Currently the wallet can be controlled by Windows PC, MacOS and Linux. Android support is expected soon.
Customer Rating: 4/5 on Amazon.com
2. Ledger Nano X – $119
Ledger is perhaps the most popular hardware wallet. The wallet was created by Ledger Inc in 2014. Ledger Nano X is the most popular and advanced hardware wallet from Ledger. It features a button controlled operation and has one monochrome LCD screen. The wallet supports Bluetooth connectivity. You can directly buy, swap and sell from the wallet. Ledger Nano X also features crypto staking function. The supported device for the controller software runs are Windows, MacOS and Linux based devices.
Customer Rating: 4.5/5 on Amazon.com
3. Ellipal Titan – $139
Ellipal claims Titan to be the world’s first 100% air-gapped wallet. This is a device which features a camera which helps verify transactions by scanning QR codes on the controller application on Desktop or Mobile. The device features a 4-inch touchscreen operation. There is a 1 year product warranty and a 30-day return policy. The Ellipal Wallet supports over 40 blockchains and over 10,000 coins and tokens. The wallet also features buying, staking, swapping and selling options
Customer Rating: 4.2/5 on Amazon.com
4. SafePal – $49
SafePal is the most affordable option in our list. It features a 5 key operation and a 1.5 inch IPS LCD screen. The device also has a camera attached to it which users can use to scan QR codes on mobile and desktop wallets. These QR codes are used to authorize transactions from the wallet itself without any connectivity. It supports over 54 blockchains and claims to support unlimited tokens. New tokens can be onboarded via firmware upgrades. The upgrade can be done by connecting the device to desktop using a USB cable.
Customer Rating: 4.3/5 on Amazon.com
5. DCENT Biometric Wallet
The DCENT Biometric wallet is the only wallet in our list that supports Biometric access. The wallet is made by DCENT, a brand by IoTrust Co., Ltd in South Korea. The wallet supports over 2800 coins and tokens. It is controlled by 4 buttons and features a small LCD screen. The wallet offers buying, selling, swapping and staking functions. The wallet uses QR codes to communicate with the controller device and sign transactions.
Customer Rating: 4.5/5 on Amazon
Final Thoughts
It’s always a good practice to compare and analyze the pros and cons of the available options and do your own research before choosing anyone.
Cryptocurrency users should ensure that the wallet of their choice is compatible with the coins they transact or trade-in with since not all wallets support all cryptocurrencies. Moreover, it should be safe, authentic, and compatible with their devices as well.
Those who have decided on crypto investment, often use a combination of hot and cold wallets. They use cold wallets for bulk storing and hot wallets for small transactions and day-to-day trading. If you mind the importance of keeping your crypto safe, cold wallets are worth considering.
