They say—Get a Cold wallet and Sleep tight at night!
True, Quite True.
They say—Not your keys, not your coins
Again very True.
And to make this all possible, to keep the private keys isolated from the internet, a Cold wallet was introduced to the Crypto community.
Crypto phishing attacks or thefts from exchanges or direct security breach on Layer 1 or Layer 2 Platforms has been on the rise. Somehow, bad actors keep luring people into their trap, with their creative scam ideas.
Probability is you would make it out safe, if you don’t click any unverified links, keep your private keys and recovery phrase to your self and don’t sign any unknown transaction. But the scammers are so good, so creative especially in the crypto space, that they deserve an art gallery of their own. It's unethical, but art.
With scams rising, security had to level up, and it responded very well with a cold wallet storage option.
And in this article, we have explained cold wallet, its types, and mechanisms, so that you can hold crypto safely and have a better sleep at night.
What is a Cold Wallet?
A cold wallet is an option to store numerous cryptocurrencies, similar to any other crypto wallet, except the private keys never make their way online.
Upon purchasing, mining, or receiving crypto, it comes with two foremost things: public and private keys.
A public key acts as an address, similar to an email address, that is used to send or receive crypto. Whereas Private keys are a string of alphanumerics random characters, like a password that creates a digital signature proving the ownership of crypto on the blockchain. (Never share your private keys with anyone)
The threat is always there, if found by someone else, the assets stored in a wallet can be accessed without any authorization of the real owner. Remember not your keys, not your coins.
And this is where the cold wallet comes into play, it is designed in such a way that private keys are kept isolated from the internet even when doing transactions online.
Designed like a USB stick, that cost around $79 to $200, it is the safest way to store crypto known to this day.
When the private key never goes online, it becomes a tough task for bad actors to perform their art— thievery.
Upon setting up any crypto wallet, it generates a random 12 or 24 random words called seed phrase/recovery phrase. It’s a way to access your wallet, along with private keys attached to it. The seed phrase is the only way to restore a lost wallet, hence made simple, so every user can remember (like “Hunt”, “Head”, “Book”, “Wine”, “Music” or “Death”).
Even after losing or delegating the crypto wallet, it can be restored via only private keys or seed phrase.
Are hot wallets more prone to attacks than cold wallets?
Yes, hot wallets are more prone to theft and online security breaches any day compared to cold wallets.
Hot wallets are online storage for cryptocurrency. In this case, the private keys are encrypted within the wallet, but it remains online.
The probability of a bad actor stealing your keys is increased, if so, crypto stored can easily be compromised.
Usually, hot wallets are free and have a more attractive user interface and cool graphics that can be simply accessed with a Chrome or any browser extension or a mobile app.
For example:- The Metamask wallet issued a warning on Twitter, and asked its apple users not to back up their wallets on iCloud, as things such as phishing are more prone to happen if they have a weak password (that are used to encrypt private keys).
Metamask, with 30+ million users, is one of the largest wallet service providers. However, hot wallets are merely a user interface, the service provider is many, yet, none of them has any power over your assets. Setting up a wallet is a hundred per cent anonymous, neither of the service providers asks for any documents, not even an email address.
The options for hot wallets, other than Metamask are Trust wallet, Coinbase wallet, Electrum, Exodus, and Edge wallet.
Hot wallet vs. Cold Wallet
Any day, hot wallets are very convenient to use compared to cold storage, as cold wallet requires a signing on a hardware device to confirm the transaction.
Cold wallets are a little time-consuming while transferring assets, though it's deemed more secure than a hot wallet.
Hot wallets are free, a user can set up an infinite number of wallets without even paying a single buck, and these wallets can be used with the convenience of a single click.
Cold wallets can be integrated with a hot wallet as well, however, for every trade, the user would have to sign it from the physical device. In the other words, hot wallets only provide a user interface for cold wallet transactions.
Hot wallets are more vulnerable to online attacks, and thefts, while bad actors fail to reach within a cold wallet as the keys are forever isolated from the internet.
Options for a Cold Wallet
When it comes to buying a wallet, the options are restricted to these giant cold wallet manufacturers—Ledger & Trezor cold wallet.
Another cold option would be Paper wallets, however, this kind is popularly used for one-time transactions such as donations or sending gifts.
One can also host a cold wallet on its own, as everything in the crypto space is decentralized. However, this would demand a huge understanding of security, encryption, computer programming, and time to make a secure cold wallet.
Ledger Cold Wallet
Started back in 2013, by a bunch of colleagues with a strong grasp of embedded security, crypto, and entrepreneurship. It's headquartered in Paris, France, and its main office is in the heart of the crypto city—San Francisco, California.
Ledger is a USB device type cold storage, that uses space storage to keep private keys isolated from the internet. It comes in two variants—Ledger Nano S and Ledger Nano X.
Ledger Nano S was introduced in 2016 and costs around $59. Integrated with a secure chip, it allows a maximum of 20 applications.
Its upgrade Ledger Nano X came in 2019 and retails at $119. It allows more application installation than its predecessor, expanding up to 100 applications. Moreover, it also comes with Bluetooth, meaning users can connect to their mobile without any USB for convenient use.
Ledger gained huge traction after its integration with Bluetooth, making Ledger useable on the go.
Trezor Cold Wallet
Trezor started back in 2014 when bitcoin and altcoins were in the early phase and security was a big thing, Trezor came up with its hardware, that keeps the private keys isolated from the internet.
It has an open-source code, meaning anyone can read code, test the security and inform the original party.
If compared with its rival ledger, it doesn’t have Bluetooth, however, it comes with a touchscreen making things very simple and smooth.
Comes in two variants: the Trezor T model and the Trezor One. Upon setting up the wallet, only 12 random words are generated in the Trezor wallet recovery phrase.
Paper Wallet— another form of Cold Wallet
It’s non-custodial cold storage, where it generates public and private keys on a piece of paper or even in form of a QR/ Bar code. From there on, the crypto can only be accessed via that paper.
It was popularly used Before cryptocurrency gained traction. When you choose to print, the private keys are removed from the online storage, making paper the only way to gain access.
It's often used for donations or gifts as most of the time it’s only a one-time transaction. If you happen to lose, burn, or tear your paper wallet, forgot about the crypto because that was the only way to access your crypto.
Pros of Cold Wallet
Cold wallet guarantees the maximum level of security in the crypto space, providing you don’t share or lose your seed phrase.
Cold storage is best for long-term holdings, as we have seen numerous security breaches on crypto exchanges. Usually, the crypto exchange recovers the attacks or ends up paying for the loss, but the threat is always there and a lot of inconveniences can be avoided with just a cold wallet.
Other than a good mattress, pillow, and healthy environment, having your Crypto stored in a cold wallet is good for your night's sleep.
The private keys are never online even when connected with an online device, making it the most secure way to store crypto as the saying goes, "not your keys, not your coins."
Even if you lose, or delete your wallet, it can be restored with the seed phrase, that was shared with you upon setting the wallet for the very first time. Never share your recovery phrase. No one can recover your seed phrase, not even the wallet service, provider.
Cons of Cold Wallet
Cold storage is expensive, a good hardware wallet can range from $80 to $250.
It requires an extra step to send/receive crypto, which can take minutes as the user have to go through extra security steps by signing the transaction on the physical device.
Takes a huge amount of time to set up initially. When a device like a ledger gives 24 seed phrase and the Trezor generates only 12. It could be a mess upon recovering a lost wallet using seed phrases. Hard wallets are not convenient for typing, hence it becomes a tough task.
Usually a slightly inconvenient to use, even with a touchscreen in Trezor, or Bluetooth in the ledger, a hard wallet software demands a huge effort to use as you have to go through extra security measures.
Final Thoughts on Cold Wallet
Even though cold wallets have a few disadvantages, cold storage is still the most secure way to store crypto. Over time, numerous hackers have targeted centralized crypto exchanges. Even the biggest exchanges like Binance, Kucoin, or Bitfinex have fallen victim to bad actors.
Crypto exchanges are only meant for trading crypto, as the name suggests in the very first place, however, these exchanges also allow holding crypto on its user's behalf. To prevent security breaches, exchange themselves prefer cold storage.
Cold storage's main goal is to keep the private keys isolated from the internet, and no one does it better than cold wallets.
So do yourself a favor, purchase a cold wallet, don’t share the seed phrase, hold crypto for the long term and sleep like a child.