- Various methods for storing crypto have been presented, balancing security and convenience
- Holding crypto on exchanges has offered instant access but posed significant security risks
- Cold wallets have been identified as a medium option, providing a balance between security and accessibility
When it comes to storing your crypto, there are a few ways you can do it, each of which strikes a balance between security and convenience. On the one hand, there is holding your crypto on exchanges which offers you instant access to your funds for trading but carries the biggest security risk. On the other, there are ultra-secure air-gapped hardware wallets that the army would use if it held crypto. Somewhere on this scale is a happy medium, and it is this happy medium, known as a cold wallet, that we will explore today through our guide to cold wallet storage.
Why Are Cold Wallets Better?
When it comes to crypto storage, there are two types of storage – ‘hot’ wallet storage and ‘cold’ wallet storage. Hot wallets are those that are almost always connected to the Internet. These include mobile wallets, computer desktop wallets, and exchanges. These wallets are very convenient, and are more secure than they used to be, but they present several security risks.
On the flip side, we have cold wallets. A cold wallet is a wallet that is not connected to the internet, except when used to manage the wallet in question. These sit at the other end of the security/practicality spectrum due to the fact that there are more steps involved in using them, but they are much safer.
These come in the form of hardware wallets—USB devices that act as the gateway to your crypto holdings—and paper wallets, the kind that Bitcoiners have been using since 2011 to store assets offline.
Wise heads in the crypto space will tell you that cold wallet storage is the way to go, so what exactly are the benefits of a cold storage crypto wallet over a hot wallet? Let’s find out.
How Are Coins Held on a Blockchain?
Before we learn about hot and cold wallets, we need to know how crypto is actually stored on a blockchain. The key thing to remember about crypto wallets is that, unlike with a regular wallet, your crypto is not actually sent to the wallet. This is because of how the blockchain works. In many ways, a crypto wallet, be it hot or cold, is like a banking app – the money is not actually in the app, it is in a bank account which you are accessing through the app.
This is the same with a crypto wallet – your crypto is sitting on an address on the blockchain, and the only way to access it is through an app of some sort. So think of your cold wallet as a key to your safe, rather than the safe itself.
With that understood, let’s learn about cold wallet storage.
What is a Cold Wallet?
Cold wallets are simply crypto wallets that are not connected to the internet, apart from when coins are being sent or received. This is in contrast to hot wallets, such as a mobile wallet, which are connected to the internet whenever the device is – which is almost all the time. This means that the window of opportunity for a hacker is vastly reduced with a cold storage wallet, although the risk is not mitigated entirely.
Another reason a crypto cold wallet is more secure than a hot wallet is because it is entirely in your possession, as are the coins within it. This means that the only way someone can gain access to the coins associated with the wallet is through physically accessing the device itself.
Even if someone were to somehow get their hands on your cold wallet they would need a password or some other kind of login in order to do anything with the funds, representing another layer of security. This is different to a hot wallet, where access to your funds typically sits on a central server, a server whose security methods you have no idea about.
Can a Cold Wallet be Hacked?
Along with this idea of personal security comes the concept of control of your funds. This can be boiled down to a key mantra in the crypto space – not your keys, not your coins. This refers to your private key, which is akin to the password of a banking app, allowing you to restore access to your cold storage wallet should you lose the device itself or it malfunctions. It is therefore very important, as anyone who has it can get into your Bitcoin cold wallet and take your funds.
When you are informed of your private key, write it down somewhere and keep it very safe (not online). If your cold storage wallet for cryptocurrency breaks or you lose it, don’t panic – as long as you have this private key or mnemonic you can restore access to your funds on another device. This is the advantage of having the coins stored on the blockchain and the cold wallet storage device being a portal, rather than being the location of the coins themselves.
If you are very careful with your private key, the chances of your cold wallet USB device or paper wallet being hacked are extremely low. The only other risk you face is downloading rogue software, but if you download from official sources you will almost certainly have a hack-free experience with a crypto cold wallet.
How to Use a Cold Wallet
Using a cold storage crypto wallet is much easier than it used to be, which has helped drive their popularity. Cold wallet crypto devices now come with dedicated software, which is what you will use to manage the coins in the wallet. It’s simply a case of plugging the cold wallet into your computer and logging into the program – once you’re there you can check your portfolio, send funds and in some cases even stake your coins.
If you generate a transaction you need to confirm it on the cold storage wallet itself before it will proceed. This is a security feature that ensures no one can remotely move the funds in your wallet.
Paper wallets are a little more complicated, but still worth exploring, seeing as they’re much less expensive than a cheap cold wallet – they’re completely free! When you send funds to a paper Bitcoin cold wallet address you will be left with a QR code and a private key to print out. The QR code is in effect your free hardware wallet and the private key is, as we know, the way you unlock it, so whatever you do don’t store them in the same place!
When you want to check the contents of the paper cold storage wallet or send funds from it, you can use the QR code using a resource such as blockchain.com, enter the private key and you will have access to the funds in the wallet. However, it must be noted that paper Bitcoin wallets have several crucial downsides that should not be discounted.
Is a Cold Wallet Really Necessary?
Hopefully, this guide has left you with the firm impression that, indeed, cold storage wallets, whether a fancy USB hardware wallet or a piece of paper, are worth their weight in gold (or bitcoin). Most reputable crypto outlets, even exchanges, recommend holding the bulk of your crypto in a cold wallet for security purposes and only keeping a small proportion in a hot wallet for easy access. You don’t even need the best cold wallet on the market – even a cheap cold wallet will keep your funds more secure than a hot wallet.
Cold wallet technology has come along leaps and bounds in recent years and prices have come down, making cold storage wallets much more affordable for the regular crypto user. They each have their pros and cons, but what constitutes the best cold wallet for cryptocurrency is something only you and your budget can decide.
However, with plenty of options out there now, and hardware wallets getting cheaper with each iteration, there’s no excuse for not taking the best care of your crypto than you can.
