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With a cold wallet, you can protect your digital assets by taking them offline, and store your crypto assets in a digital wallet. These digital wallets have a lower susceptibility to attacks due to their lack of internet connectivity.
The recent slump of FTX is a great example of why keeping some or all of your cryptocurrency in cold storage works. When your crypto assets are on an exchange like FTX, you can only access these assets if the exchange can distribute your funds to you. If attackers target or if there’s mismanagement of funds at this exchange, they could make your money disappear.
What is a cold wallet?
A cold wallet is a crypto wallet that is not connected to the internet and stores your private keys offline. There are three types of cold wallets: paper (Paper Wallet), hardware (Hardware Wallet), and sound (Sound Wallet).
Hardware Wallets
Hardware wallets store cryptographic keys offline and range in price from 50 to 150 dollars. Some advanced technology hardware wallets include screens and buttons that can enhance the user experience and require a physical connection with an internet-connected device to make transactions.
Some of the market leaders for hardware wallets are Trezor, Ledger and SafePal, and many modern iterations have simple user interfaces to simplify the asset storage process.
Paper Wallets
Cold wallets are available in many different formats and the paper wallet approach is the most basic to offline crypto storage. Paper wallets are typically documents that store private and public keys and even a QR Code address for storing cryptocurrency offline. Since the keys are generated offline, users can securely transfer crypto to paper wallet addresses, knowing that the keys were never exposed to the internet.
Sound Wallets
As a more unusual way of adopting cold storage of crypto assets, it’s possible to encrypt your private key or your seed phrase’s verbal readout using a CD, USB flash drive or even a vinyl disk, encoding the wallet information in an unlikely manner.
5 Reasons You Should Use a Cold Wallet
Is it really worth locking your cryptocurrency in an offline cold wallet? While there may not be an easy answer to this question, there are several reasons why cold wallets deserve serious consideration.
1. Ensuring Safety from Cyber Attacks
As we mentioned before, cold wallets prevent cyber attacks by securing your cryptocurrency’s private key offline, preventing anyone from gaining access.
Hot wallets generate private keys online and sign each transaction digitally with your private key before sharing it on the blockchain network. This can provide enough information for hackers to exploit security vulnerabilities in the hot wallet provider, for example, in an attempt to gain unauthorized access through crypto phishing scams.
Since it operates completely offline, hackers cannot compromise the cold wallet; however, it’s equally crucial to securely store your hardware wallet in a safe physical location.
2. Full Control of Your Private Keys
Most importantly, cold wallets also give you full control over the security surrounding your private keys and crypto assets. With hot wallets, where you rely on third parties to store your private keys and ensure the security of your assets, this is not the case.
Remember: Here, what matters are your keys, not your money.
3. Easy to Recover
When setting up a hardware wallet, the device generates a unique 12 to 24-word recovery phrase for you. To recover your data in case of wallet damage, loss, or theft, you can purchase a new hardware wallet and utilize your password and keywords with it.
4. Rich Range of Cold Wallet Options
You don’t need to spend heavily on expensive hardware wallets to setup a cold wallet. Using a piece of paper displaying your private keys can be a functional way of keeping your investments offline.
5. Store High Value Investments with Confidence
The most important reason to use a cold wallet is to store your high value crypto investments offline.Although many people engage with cryptocurrencies and lean towards trading, those who hold larger volumes of crypto and cannot afford to incur significant losses in the long run find cold wallets to be ideal.
This doesn’t mean that those with less crypto shouldn’t consider using a cold wallet. The other securities afforded by a cold wallet should not be underrated.
Disadvantages of Cold Wallets
While cold wallets may be the best way to keep your crypto investments safe, there are some notable disadvantages worth highlighting.
- Lack of Functionality: Although your crypto is safe offline, this doesn’t mean much to investors who want to buy and sell crypto frequently. Making transactions in short notice is also more difficult.
- Can be Expensive: Although cheaper hardware wallets start at about 35 dollars, this still represents an entry barrier not found in hot wallets that can be downloaded for free.
- Less Convenience: Many cold wallets offer mobile compatibility where they connect to your device via Bluetooth. However, despite this added accessibility, cold storage is still less convenient compared to hot wallets that can operate as easy-to-use mobile applications.
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