Keeping the assets secure is one of the most important aspects of investing in cryptocurrency. As a result, using cold wallets is usually the safest option for storage. By keeping assets offline, the threat of digital attack is virtually eliminated, significantly improving overall security.
Throughout this guide, we’ll look at the best cold wallets for cryptocurrency, discuss what a cold wallet is and how they work, and look at some of the benefits of cold storage. Let’s get astarted.
What Is Cold Wallet?
Cold storage is an offline wallet for storing bitcoins or other cryptocurrencies. The digital wallet is stored on a platform that is not connected to the internet, protecting it from unauthorized access, cyber hacks, and other vulnerabilities that a system connected to the internet is vulnerable to.
Cold storage methods are useful for individual investors, but cryptocurrency exchanges and companies involved in the crypto space also use this type of wallet. Cold storage can also refer to other modes of operation for storing inactive data, such as data for regulatory compliance, video, photographs, and backup information.
How Cold Wallets Works
All cryptocurrency storage revolves around safeguarding your crypto keys. Your keys are kept offline except during the transaction process with cold storage.
For cryptocurrency, there are two types of keys (strings of cryptographic data): public keys and private keys. During transactions, the public key identifies the specific crypto wallet. The private key is the code that grants the owner access to the cryptocurrency stored in the wallet.
Assume you have a hardware wallet to demonstrate how cold storage works. You must first connect it to your computer before you can use it. Following that, you select the option to receive cryptocurrency, which generates an address. You can send your cryptocurrency to this address to have it stored on your cold wallet.
Because the device contains both your public and private keys, once you disconnect it from your computer, that information is no longer accessible.
It’s a similar process if you want to transfer cryptocurrency from your cold wallet to another address. Connect the cold wallet to your computer, type in the address, and send your cryptocurrency.
Cold wallet advantages
High security; it is unlikely to be hacked as private keys never come to connect with a user’s computer network.
- Ability to back up whole digital assets in hardware wallet
- Multi signatures to protect the wallet from hackers. An approval for a transaction has to be approved by a number of people.
Cold wallet disadvantages
- The complexity of use : users need to print information on paper then input data to computer or mobile phone when it is needed.
- It can easily get lost and if lost, all digital assets will be lost forever.
- Hardware wallets are more expensive than other wallets (Ledger Nano X price ranges from around $30 to $3,000)
- Can lose hardware wallet and private keys will be lost forever.
- A hardware’s service life is short.
Components Of Cold Wallet
Below are the the components of cold wallets in other words, their characteristics;
- They do not require third parties to handle the keys and manage the cryptocurrencies; as it happens with online wallets.
- They have limited means of communication to maximize the security they offer.
- Generally they allow adding an extra layer of security through the PIN configuration of choice, it prevents a third party from using the device.
- The keys are generated and maintained within the same device where the wallet is used. They never come out of such a device, so they are kept safe and secure.
- They are compatible with most of the available operating systems.
- They have the ability to generate a seed that allows us to restore the keys and recover the funds.
- Brianda paper wallets, are not feasible to breakdown or damage to the equipment as it happens with other types of cold wallets, such as hardware wallets.
- By not staying in line with blockchain networks and the Internet, they offer protection and security against malwares and other malicious software.
- They allow us to store large amounts of money safely and efficiently.
Types Of Cold Wallet
There are numerous companies that provide various options for safeguarding cryptocurrencies, and it is up to us as users to select the one that best suits our needs.
When it comes to cryptocurrencies and their security, cold wallets are one of the first options. Wallet papers were the first cold wallets however, as technology advanced, hardware wallets and software wallets capable of creating cold storage became available. All of this is done to ensure the highest level of security for its users.
Hardware wallets are cold storage wallets that use an offline device or smartcard to generate private keys offline. The Ledger USB Wallet is an example of a hardware wallet that uses a smartcard to secure private keys.
TREZOR and KeepKey are two other well-known hardware wallets. The device looks and functions like a USB, and a Chrome-based app is required to store the private keys offline.
You can use anything from a simple USB storage drive to a sophisticated device equipped with a battery, Bluetooth, software, and other features. As with a paper wallet, it is critical to keep this USB device and smartcard in a secure location, as any damage or loss could result in the user losing access to their bitcoins.
Air-gapped devices have no connection capability and are therefore more secure than wirelessly connected devices. Commercial hardware wallets are available for purchase from retailers and merchants; many are waterproof and virus-proof, and some even support multi-signature (multi-sig) transactions. Multi-signature is a cryptocurrency signature method that requires multiple users to use private keys to approve a transaction.
These are the wallets that offer greater security in terms of computer attack protection. However, if they are not well cared for and protected, they are prone to deterioration, damage, or misplacement of the paper on which they are printed.
They are, as the name implies, wallets printed on paper that contain the public and private keys as well as a QR code. This is to make the transactions we want to carry out later easier.
Currently there are many websites where you can enter and generate a paper wallet. Among the main options of this type are
Both with a high level of security that even surpasses hardware wallets if they are used correctly.
Sound wallets are an obscure and expensive way to store your keys, depending on your chosen medium. Sound wallets involve encrypting and recording your private keys in sound files on products such as compact discs (CDs) or vinyl disks (records). The code hidden in these audio files can be deciphered using a spectroscope application or high-resolution spectroscope.
Deep Cold Storage
Placing your hardware wallet in your safe is safe, but it isn’t considered deep cold storage because you can easily access it. Deep cold storage is any method of storing your keys that is inconvenient and requires time and effort to retrieve.
This could range from burying your hardware wallet six feet deep in your garden in a waterproof container to using a third-party service that stores your cryptocurrency keys in a vault that requires multiple steps to access.
Burying your keys deep in the garden has several drawbacks, including lots of digging and remembering where you buried then, but so does the ultra-secure vault service. Vault services generally require your identity, proof of address, or other means of identification.
Additionally, it can take hours or days to access your keys, depending on where they are physically stored. This means that cryptocurrency funds held in deep cold storage are not readily accessible for transactions.
Is Cold Storage Best for Cryptocurrency?
Cold storage removes your private keys from your wallet, so it is currently the best method for storing your cryptocurrency private keys because it denies anyone access to them.
What Happens When You Put Cryptocurrency in Cold Storage?
When you place your keys in cold storage, they are removed from your wallet. You still see your cryptocurrency in your wallet because ownership is stored on the blockchain but you cannot use them until you move the keys you want to use back to your wallet.
Given how critical it is to keep your cryptocurrency secure, cold storage is a viable option worth considering. A hardware wallet is a relatively low-cost one-time purchase, particularly if you intend to make a significant or long term investment in cryptocurrency.