- Crypto wallets have come a long way over the years, but they are still either hot or cold wallets
- The difference is important to understand as it affects the security of your holdings
- We believe that cold storage is the best option in today’s crypto market
When it comes to crypto wallets, the choice is almost endless. However, whether you’re using a mobile wallet or a piece of paper, there is one thing that unites all crypto wallets: it will either be a hot or cold wallet. The difference between the two wallet types is important and sometimes not fully appreciated. In this piece we go over cold wallets and why they are the best choice for storing your crypto.
About Crypto Storage
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 and include mobile wallets, web wallets, and computer desktop wallets. 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 and have become easier to use in recent years. 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 store your private key offline, meaning that no one can get hold of it remotely (we’ll see in the next section why this is so important). 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 – and typically don’t let you have your private key. The cold wallet acts as a barrier to hackers taking your coins, with physical access to the device needed to send coins out of it.
The window of opportunity for a hacker to obtain your private key is therefore vastly reduced with a cold storage wallet, although the risk is not mitigated entirely.
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 if it malfunctions. It is therefore very important, as anyone who has it can get into your cold wallet and take your funds.
You’ll be given your private key upon initial setup, so write it down somewhere and keep it very safe (not online). If your wallet breaks or you lose it, don’t panic – as long as you have this private key (or mnemonic phrase, which is usually given out as an alternative) 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 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 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.
Is a Cold Wallet Really Necessary?
Hopefully, this guide has left you with the firm impression that cold wallets 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. We don’t recommend using paper wallets, however; they are no longer secure to set up.
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.
