Cold Wallet

Cold wallets are a type of crypto wallet, those that use keys generated by a source that is not connected to the blockchain and therefore is not connected to the internet. This is why they are called cold wallets. This type of wallet has a huge advantage over other types of wallets as they play the role of a savings bank account. We can store our deposits there. They are most commonly used by users to store and protect large amounts of cryptocurrency as they provide an unparalleled level of security. Being infrequently connected to the internet makes you less vulnerable to hacking or key theft. However, there is still a risk of losing money if the hardware or paper containing the key is lost.

How Does a Cold Wallet Work?

All cryptocurrency storage revolves around protecting your encryption keys. Using a cold wallet can ensure that your keys are always offline during the transaction process, and are not vulnerable to hacker attacks and theft if they are not connected to the Internet.

Cryptocurrencies have two types of keys (encrypted strings of data): public keys and private keys. The public key identifies a specific crypto wallet during transactions. A private key is a code that allows the owner to access the cryptocurrency in the wallet. Let's say you have a hardware wallet, to use it you first need to connect it to your computer. Next, you select the option to receive cryptocurrency, which will generate an address. You can send your cryptocurrencies to this address to store them in your cold wallet. The device holds both your public and private keys, so once you disconnect it from your computer, the information is completely offline. If you want to transfer cryptocurrencies from your cold wallet to another address, it's a similar process. Connect the cold wallet to your computer, enter the address, and send your cryptocurrencies.

Categories of Cold Wallets

Paper Wallet

A paper wallet is simply a piece of paper on which you print your private and public keys. They often include a QR code that can be easily scanned to speed up transactions. It's important to store paper wallets properly in a safe place, otherwise they can easily get misplaced, stolen, or destroyed. The fact that they make your private key fully visible also means they run the risk that someone will see your private key and be able to access your blockchain address.

Sound Wallet

Sonic wallets are another innovative way to provide secure cold storage for cryptocurrencies. Users encrypt and record high-quality audio of their private keys or mnemonic phrases using sound file products such as CDs, vinyl records, or USB flash drives. Users often set up spectrometer applications or devices to decode keys in the future. At the same time, they can transfer cryptocurrencies to relevant addresses for cold storage at any time.

Sound wallets are often considered an expensive way to store cryptocurrency. However, its main appeal is that it encourages long-term storage, as users go through a lengthy process to recover their private keys.

Cryo Wallet

Deep cold storage wallets are a subcategory of paper wallets and are typically used by people who have minimal need to access the wallet: perhaps someone who saves cryptocurrencies to be passed on after a set period of time or upon death. Using a cold wallet eliminates the need to regularly access the wallet, and holders can store their critical information (such as private keys and mnemonic phrases) in a way that prioritizes security over access. That's why it's called "deep" storage. A simple example of deep cold storage could be a memory card containing all the private keys and locking them in a safe deposit box, safely stored in a bank. Some people store copies of their recovery phrases in multiple locations.

Hardware Wallet

A hardware wallet is a physical device that protects your private keys offline. The benefit of using a device is that the keys are hidden, even when you are making transactions. Hardware wallets generate your private and public keys in an offline environment, meaning they are never exposed to the vulnerabilities of your internet connection. Hardware wallets are isolated from the internet, so they cannot be penetrated by hackers who want to access your private keys. If you lose your hardware wallet, your recovery phrase allows you to recover your funds.

Features of Cold Wallet

• Cold wallets provide protection and security against malware and hacker attacks by not connecting to the blockchain network and the internet.

• Cold wallets allow us to store large amounts of funds safely and efficiently.

• Cold wallets do not require a third party to handle keys and manage cryptocurrencies.

• Cold wallets have limited communication methods that do not maximize the security they provide.

• Typically, cold wallets allow you to add an extra layer of security via a PIN configuration of your choice to prevent third parties from using the device.

• Keys are generated and saved on the same device using the cold wallet, so they never leave the device to stay safe.

• Cold wallets are compatible with most available operating systems.

• Cold wallets have the ability to generate seeds, allowing us to recover keys and recover funds.

When Should You Use a Cold Wallet?

If you don't need to spend or move crypto assets frequently, or if you hold Canadian currency long-term without needing to use it, cold wallets can serve as a safer alternative for storing crypto assets. Many people choose to store their cold wallets in a bank safe deposit box, where the items are insured against theft or damage. These alternatives allow you to take advantage of legal protections that would otherwise be ineffective when your cryptocurrencies are stored in a wallet.

Additionally, if you are unsure of the strength of your internet or the security of your computer, it is best to consider using a cold wallet to store your cryptocurrencies until you find a more secure computer or connection to access your hot wallet. Cold wallets provide a convenient way for cryptocurrency users to separate funds they wish to hold long-term from funds they wish to actively use to interact with NFT markets, blockchain games, DeFi protocols, or other types of dapps. The more cryptocurrency you store offline, the better you can manage the risks that come with interacting with different dapps and chains, many of which are very new and may not be completely secure.

Why Should You Choose a Cold Wallet?

A cold wallet is essential as it reduces the risk of hackers stealing your funds. These solutions provide robust security protection against online attack vectors such as software viruses, clipboard malware, and smart contract vulnerabilities.

For example, the largest cryptocurrency wallet hack of 2022 was caused by exploiting a vulnerability in the mobile wallet app Slope that stored users' mnemonic phrases. The company set up centralized server storage for each mnemonic phrase, allowing hackers to access every phrase generated by the wallet. In just over four hours, approximately $4.1 million worth of assets was drained from the wallet addresses of 9,231 users. This type of exploitation is not possible with cold storage solutions that keep the entire wallet generation process offline. Cold wallet seed phrases are only visible to the owner.

Additionally, cryptocurrency transactions are irreversible and typically are not covered by insurance policies like traditional finance. Users must take active steps to protect their assets, and cold wallets are one of the most widely used options. Cold wallets can provide greater security by integrating multi-signature support and additional passphrases.