- Cryptocurrencies are pieces of data stored on a blockchain system and the only way to access them is through access keys called private keys. A crypto wallet stores these keys in itself and provides you with a user-friendly interface to interact with the blockchain network your coins are living on.
- Cold wallets act like a closed, isolated, secure safe that you can only open in person. You need to have access to the physical device and enter the PIN code correctly to open it.
- Paper wallets, hardware wallets, and sound wallets are different types of cold wallets that are trying to keep your private keys offline and out of the reach of online threats.
- Working with cold wallets isn’t as convenient as hot wallets as they are connected to the internet. As a result, crypto users try to segregate their crypto assets based on their value and risks.
- Long-term investments are usually stored in a cold wallet to mitigate the risks as much as possible. Short-term holdings, on the other hand, are kept in hot wallets for better access.
Table of Contents
- What is a crypto wallet?
- How does a cold wallet keep your private keys safe?
- Different types of cold wallet
- How to use a hardware wallet
What is a crypto wallet?
Just like a physical wallet that we use to keep our cash or credit cards, a crypto wallet is where we can store our digital coins, with a few differences of course!
To explain it very simply, cryptocurrencies are pieces of data stored on a blockchain system and the only way to access them is through access keys called private keys.
A crypto wallet stores these keys in itself and provides you with a user-friendly interface to be able to interact with the blockchain network your coins are living on.
These private keys are quite valuable as they are the proof of ownership of any cryptocurrency you have. Without these keys, you won’t be able to transfer crypto coins to anyone else (in other words, spend them) even if you are the true owner.
This is why we have this famous saying in the crypto world:
Not Your Keys, Not Your Coins!
Self-custodial crypto wallets will allow you to take control of your private keys. With a self-custodial wallet, you will store your private keys on a self-owned device. This is unlike custodial storage which keeps your data on your behalf.
Crypto wallets come in two main categories: cold wallets and hot wallets. The main difference between cold wallets and hot wallets is their connectivity to the internet.
Now, let’s see how a cold wallet works.
How does a cold wallet keep your private keys safe?
By cutting any online connection to the outside world, cold wallets try to eliminate any external threats that may find their way to your private keys through an online connection.
Cold wallets act like a closed, isolated, and secure safe that you can only open in person. You need to have access to the physical device and enter the PIN code correctly to open it.
Cold wallets are always offline and don’t connect to the internet. Considering the great variety of online threats, especially in the young crypto space, cold wallets were designed to act as a secure long-term storage solution.
Working with cold wallets isn’t as convenient as hot wallets as they are connected to the internet. With hot wallets, you can simply transfer your funds online once needed and won’t need the actual wallet. This feature is quite important for users such as traders who make a considerable number of transactions and explore how emotions impact on trading.
As a result, crypto users try to segregate their crypto assets based on their value and risks. Valuable, long-term investments are usually stored in a cold wallet to mitigate the risks as much as possible. Short-term holdings, on the other hand, are kept in hot wallets for better access.
Different types of cold wallet
We have different types of cold wallets all of which are trying to keep your private keys offline and out of the reach of online threats.
Probably the first of their kind, paper wallets are simply a piece of paper with private keys printed on them. The piece of paper can then be kept in a secure place like a physical vault.
Paper wallets are quite easy to set up and you won’t need to pay for any extra equipment. However, they come with various flaws that make them unsuitable for the needs of today’s crypto users.
Paper wallets can easily be damaged, lost, or stolen. If they are in the wrong hands, there’s no extra layer of security that can keep the perpetrator from accessing the private keys. Additionally, you would need to have them on an online account to do any type of transaction, a process that comes with its own risks.
Hardware wallets are the most common type of cold wallets. Hardware wallets store your private keys on a separate physical storage that doesn’t connect to the internet.
You can connect your wallet to a computer by cable and will be able to set the device up using small buttons and its screen. Hardware wallets may even use special hardware like the Secure Element Chip to boost security.
Like paper wallets, hardware wallets are also prone to physical damage but they are much more resilient. They are more convenient, secure, and user-friendly and are currently considered the best long-term storage option for cryptocurrencies.
Sound wallets are quite innovative. Private keys are recorded in audio files which are then stored on a CD, DVD, or flash drive. The main issue with sound wallets is that they are subject to degradation. Just like the other two types of cold wallets, they can also be physically damaged. They need to be backed up properly to avoid any loss.
How to use a hardware wallet
The setup of hardware wallets is not complicated but it can be confusing to some crypto users.
At the moment, Ledger, Trezor, Coolwallet, and Keystone are the main brands of hard wallets you can find in the market. These wallets come in different models, features, and prices (and bright, lovely colors) and support most major cryptocurrencies.
You need to select a model that would suit your needs. Here are some of the questions you can ask to pick the best model:
- What cryptocurrencies does it support?
- Does it use special chips for better security?
- Does it support Bluetooth? And if so, is that an important factor?
- How many different crypto assets do I need to store on it?
- Does it support NFTs?
- How fast is the transfer speed?
Once you have your cold wallet, you will need to set it up. For this, you would need to connect your hard wallet to a computer using its cable. You will be asked to set up a PIN code and back up your security phrase which consists of up to 24 random words.
Once the initial setup is complete, you need to install the blockchain networks you have in mind on your wallet. For instance, you need to install the Bitcoin app on your cold wallet to be able to transfer your bitcoins to it.
Once the app is installed, you can copy the account address and use it to transfer your funds to your cold wallet.