Cryptocurrencies are virtual currencies that use cryptography to have safe transactions and control your investment. Cryptocurrencies are decentralized, so there is no government, third-party management, or shenanigans, which may benefit you in the long run. In 2009 the first cryptocurrency in created in the form of Bitcoin. Since then, cryptocurrencies have been upgrading, and hundreds are being birthed daily.
Cryptocurrencies can be stored in several ways, including on a computer desktop wallet, hardware wallets (hot and cold wallets), smartphone wallet, crypto wallet, or online exchange. However, for ultimate security, many investors store their cryptocurrencies in a cold wallet.
A cold wallet is a physical device that stores your cryptocurrency offline and is inaccessible to hackers. This blog post will discuss five things you need to know about cold wallets for cryptocurrency storage. So read ahead and learn more!
First thing First, What are Crypto Wallets, and How does it work?
A crypto wallet is like a piggy bank for your digital assets. It's a software program that stores your public and private keys. Your public key is like your account number at a bank. Crypto wallets don’t actually store your coins but provide the means to transmit and receive them using blockchain. These are public-private key pairings that form an alphanumeric address – this is your blockchain account that can receive coins.
You can disclose your address to receive payments, but not your private key – the holder of which can dispose of associated coins by any means.
Even though your device, like your computer, is compromised, you can access your crypto coins using another device if your private key is in you or you remember it correctly.
If a third party has your account's private key, they can gain access to your funds. Crypto wallets are thus crucial for managing and securing your cash. There are different types of crypto wallets or hardware wallets, including hot wallets and cold wallets. We will further dive into that later.
What is cold storage and How does cold wallets work?
When it comes to safeguarding your bitcoins or other cryptocurrencies, one of the best techniques is to use a cold storage wallet.
As the name suggests, a cold wallet is not connected to the internet, shielding it from potential intruders, hackers, and other threats.
To use cold storage wallets, you first need to generate a private key. This private key can then be used to access your digital wallet, which can be stored on a USB drive or other offline software wallet or location. While private keys can technically be generated online, it is much safer to do so in an offline wallet to reduce the risk of them being compromised.
Once you have generated your private key and accessed your digital wallet, you can transfer your bitcoins or other cryptocurrencies into cold storage. This process can be repeated whenever you want to add or remove funds from your cold storage wallet. While it may seem like a hassle to go through all these steps, protecting your assets is worth it.
Is it better than another online wallet, then?
You're not alone if you're worried about losing your bitcoins or other cryptocurrencies to hacking.
Unlike traditional banks, no central authority can reimburse account holders for lost or stolen funds. This is because most digital currencies are decentralized and are not supported by a central bank or government.
As a result, cryptocurrency investors need to be extra vigilant when safeguarding their tokens. One of the best ways to do this is to store your bitcoins in a hardware cold wallet that's not connected to the internet. This way, your coins will be safe even if your computer is hacked. You can further protect your cash by encrypting them with private and public keys.
When it comes to cryptocurrency, security is key. That's why bitcoin owners must take care when storing their public and private keys. These keys are essential for accessing a user's bitcoin wallet and, as such, need to be well-protected.
A paper wallet or hardware wallets are two popular cold storage methods - that is, storing crypto assets offline without an internet connection to keep them out of reach of hackers.
Paper wallets involve printing out the public and private keys on a piece of paper and then storing that paper in a safe place.
Hardware wallets work similarly, except the keys are stored on a physical device like a USB or an external hard drive. By keeping their private keys offline, crypto users can be assured that their assets are well-protected.
2. Cold Wallets Vs. Hot Wallet, which is better?
What's the difference between hot and cold wallets? It's all about security versus convenience. Hot wallets are naturally connected to the internet, making them more convenient for transferring and receiving cryptocurrency. However, this also makes their safety porous and vulnerable to hacking.
Cold wallets usually take the form of a hardware device or a piece of paper. This makes them less convenient but also much more secure.
Most hot wallets are free, while a cold storage device can range in price from $50 to $150. So if you're looking for security, you'll have to pay a little extra. But if convenience is your top priority, hot wallets are the way to go.
But for those who have decided that investing in cryptocurrencies is a good idea, combining hot and cold storage is often the best way to get the best of both worlds. A hot wallet is used for smaller amounts and day-to-day trading, while cold storage is used to keep most cryptocurrencies.
This doesn't say that one method is better than the other - it's just a matter of finding what works best for you and your investment strategy. Ultimately, cold wallets are more secure, but hot wallets offer more convenience.
3. When should you use a cold wallet?
To start with, cold storage work best for long-term investments and holding. If you're not planning on selling or using your cryptocurrencies anytime soon, it's best to keep them in cold storage. As a general rule, you can get the best out of a cold wallet whenever you have more cryptocurrency than you are comfortable losing.
This cryptocurrency wallet is not required for minor cryptocurrency holdings. The price of these crypto wallets would be comparable to the value of your cryptocurrency if you have less than $100 in digital currency. Paying $50 to protect $50 worth of crypto doesn't make much sense.
Considering their typical pricing range, you might consider purchasing a cold wallet when you have $250 or more in your cryptocurrency wallets.
Nobody's risk tolerance is the same, so there isn't a universal solution. But it's wise to exercise caution given how quickly cryptocurrency prices might rise. A single $50 or $100 purchase is not much considering cryptocurrency's lucrative.
If you want to include cryptocurrency in your portfolio of investments, a cold wallet is also an excellent storage method. If you anticipate investing in cryptocurrencies frequently, get a cold wallet early for secure storage.
4. Types of Cold Wallets
Different types of cold wallets use various methods to keep private keys offline. Every kind of cold wallet has its own pros and cons that you should consider before making a purchase.
A paper wallet is the most straightforward cold storage for crypto assets. It is a document or a physical copy of a wallet that contains your public and private keys. Using an offline printer, you can print a paper wallet from an online service. The paper wallet or document usually has a QR code attached so it can be scanned and signed.
If you adopt this option, keep your wallet in a safe place because if it gets lost, unreadable, or destroyed, you won't be able to access your funds. Paper wallets offer different security features than hot wallet.
When you want to sign transactions, you must physically connect your computer to the printer where the paper wallet is stored and sign the transaction offline. This adds an extra layer of security because your private keys are never exposed online where they could be hacked.
When it comes to securing funds, there's no such thing as being too careful. That's why hardware wallets are becoming increasingly popular. A hardware wallet produces private keys without being connected to the internet using a smartcard. This makes them much more secure than regular wallets, which are vulnerable to hackers.
Ledger USB Wallet secures private keys with a smartcard. TREZOR and KeepKey are two other popular hardware wallets. To save private keys offline, a USB-like device, a computer, and Chrome software are needed. You can use a regular USB drive or an advanced gadget with a battery, Bluetooth, and software.
Like a paper wallet, a USB device and smartcard must be stored safely to protect the user's bitcoins. Hardware wallets are the most secure type of wallet available, and they're well worth the investment for anyone who takes their security seriously.
Deep cold storage
Putting your hardware wallet in your safe is secure but not deep cold storage because it's simple to access. Deep cold storage needs time and effort to extract keys. This could involve burying your hardware wallet six feet underground or employing a third-party service that holds your bitcoin keys in a vault that requires many steps to access.
The ultra-secure vault service has the same inconveniences as burying your keys in the garden, such as digging and remembering where you planted them. Vault services demand ID, address verification, or other identification. Accessing your keys can take hours or days, depending on their location. This implies cryptocurrency funds in cold storage aren't easily accessible.
Sound wallets are an uncommon and expensive technique for storing keys. Sound wallets encrypt and record private keys on CDs or vinyl (records). A spectroscope software or high-resolution spectroscope can decipher the code in these audio files.
Offline software wallets
Users looking for cold storage solutions can also consider offline software wallets comparable to hardware wallets but require more technical knowledge. An offline software wallet separates a wallet into two platforms—an offline wallet with private keys and an online wallet with public keys. The online wallet creates unsigned transactions and gives the user's address to the other party. The unwritten transaction is transferred to the offline wallet and signed. The signed transaction is returned to the online wallet, which broadcasts it. The offline wallet's private keys are safe because it's never online. Electrum and Armory are popular offline crypto wallets.
5. Is a Cold Wallet Secure? Is it for you?
Now we are ending with the fifth and final point related to the security of a cold wallet. So, as we have already seen, a cold wallet is an offline wallet that offers more protection to your cryptocurrencies than a hot wallet. But, like everything in life, nothing is 100% secure. So a cold wallet also has its disadvantages that we will see now.
The main disadvantage of a cold wallet is that it can be lost or stolen like any other physical object. Also, if you forget the password or lose the key, you will not be able to access your cryptocurrencies. In addition, setting up a cold wallet can be complicated and time-consuming for those who are not very familiar with the world of cryptocurrencies.
Nothing is too secure, and not everything is impenetrable, but a cold wallet is still the safest place to store your cryptocurrencies. If you are not willing to take risks or if you have a large number of cryptocurrencies, we recommend that you use a cold wallet. But a hot wallet will be enough if you want to trade frequently or only have a small number of cryptocurrencies.
In any case, the decision is yours, and only you know what is best for you. We hope this article has helped you learn more about cold wallets and how to use them. If you have any questions or comments, please do not hesitate to leave us a message below.