The popularity of cryptocurrency has continued to reach new heights, consequently, the popularity of a cold storage wallet for crypto is skyrocketing as well.
In this new digital age, the world is changing in ways we’ve never seen before. The days of traditional fiat are slowly diminishing. The days of securing your wealth with gold and silver simply because they were the “real thing” are long gone.
Today, anyone can secure their wealth no matter which country they live in simply by holding crypto. But where would you keep your crypto stored? The answer is a wallet. But this begs the question: “What kind of wallet should I use”?
Now, it’s worth noting that cold storage wallets are not the only option available. Hot (online) wallets are also a place where people store their crypto, but we’re going to be focusing on cold storage wallets in this article.
Holding your crypto in a cold storage wallet does not mean you’re holding it inside a fridge, or some other cold container, and a hot wallet does not mean that you’re storing it within a hot device. Cold and hot simply refer to whether the wallet is offline or online.
In this article, we will be going in-depth on cold storage wallets, their advantages, disadvantages, and variations. After you read this article, you’ll be able to find the perfect wallet based on your intentions with crypto.
What is a Cold Storage Wallet?
You’ll often hear cold wallets under the following terms:
- Offline Wallets
- Cold Wallets
- Hardware Wallets
For the remainder of this article, we’ll be calling them ‘cold wallets’ for the sake of saving time.
A cold wallet cannot connect to the internet or run complicated apps.
A cold wallet is simply an offline storage for your crypto… except, it doesn’t literally hold crypto. The idea that cold wallets hold crypto is a common misconception all over the internet. Crypto never actually leaves the blockchain, instead, the ownership of crypto in the blockchain is simply transferred from one person to another.
This is similar to how rice stones acted back in the ages of ‘primitive money‘.
So, technically, a cold wallet is simply a storage device that holds passwords known as “keys”. These keys are what give your wallet access to the crypto transactions in a ledger known as the blockchain.
The privacy of the information within a wallet is achieved by having the offline wallet use a process known as random number generator (RNG) to generate keys.
But… what exactly are keys?
Public Adress, Public Key, & Private Key
You’ve probably heard these terms being thrown around with crypto when talking about cold and hot wallets, so let’s get into their meaning:
Public Adress: This is what you send to other people who want to pay you with crypto.
Public Key: This is a long string of numbers generated by the private key, it is used by the wallet to make the public address.
Private Key: This is a long string of numbers that allows you to access your crypto whenever you’d like.
In summary, the private key is an extremely long string of numbers used to derive the public key. The public key is also made up of a long string of numbers so it is compressed and shortened to form the public address. Thus, the public address is a hashed version of the public key, and the public key is a public version of the private key.
This is why you only need the private key backed up, everything is derived from it. Most devices will offer a seed phrase so that you don’t need to remember the private key. But, again, make sure to keep this away from ANYONE. Don’t share your seed phrase with anyone because it is the equivalent of your private key.
Although cold wallets are storage devices, the other purpose they serve is signing transactions.
Your wallet uses the private key to sign transactions on your behalf and broadcast them to the blockchain. Your digital signature is how you prove ownership of a certain private key without actually exposing it. This is done through the use of complex mathematical rules known as cryptography.
This is similar to signing a check and giving it to a person!
Benefits of Cold Wallets
Cold wallets are popular because of the security advantages they offer over hot (online) wallets. Since they are not connected to the internet, there is 0 risk that anyone can hack into them, even if you plug them into an untrusted device.
Having crypto in a cold wallet is similar to having cash in a regular wallet, it offers people a feeling of control of having their crypto in their pocket and not needing an internet connection.
But always make sure that you keep your private key separate and locked up. This way, no one else can have access to your funds.
And if you were to ever lose your cold wallet, you can still access your funds with another wallet simply by using your private key. If you forget the private key or seed phrase, it’ll be the same as carrying cash and losing it when you lose your wallet.
Having a cold wallet is a reassurance that your coins aren’t going to be scammed and stolen at any given time. You don’t need to trust any third-party service providers – the responsibility rests solely on you.
Summary of Benefits:
- Disconnected from the internet
- 0 Exposure to hackers
- No reliance on anyone or anything but you for safety
- A feeling of control over your crypto
Disadvantages of Cold Wallets
A common complaint about cold wallets among the crypto community is their hefty prices; this is subjective, however, as someone with a large number of crypto holdings will see the prices of these devices as nothing if it means keeping their crypto safe.
Alternatively, someone with small holdings in crypto might see this contraption as a large overkill and a little bit too expensive.
Generally, cold storage wallets are within the price ranges of $50 to $100. The prices of each wallet depend on the functionality of the wallet. The more expensive they are, the more functions they will have, the less expensive they are, the more they only act as storage devices.
But keep in mind, the more simple a device, the harder it will be to hack into it. The fancier the device gets, the more probable it will be to hack.
Don’t support all cryptos
Another common disadvantage is the limited support of different cryptocurrencies by each wallet. This means that the wallets may not be able to hold all kinds of crypto because they don’t yet support them. This is very common because the number of cryptocurrencies is growing faster than the options of wallets that support more crypto varieties.
No Interest-Earning Potential
Certain apps, such as BlockFi, have high-interest earning potential. For example, by holding your bitcoin with BlockFi, they will pay you 6% APY for it. If you were to hold regular US currency as crypto, also known as US Dollar Coin (USDC) they pay you 8.6% APY for it. They also offer a rewards Bitcoin credit card with amazing rewards.
By holding your crypto in a cold wallet, you forego this kind of earning-potential advantage. Also, it’s worth noting, most of these types of companies actually hold their customers’ crypto on cold wallets. BlockFi is one of these companies that holds its customers’ crypto on a cold storage wallet.
The third disadvantage of cold wallets is that they aren’t as practical as hot wallets. This means that even though you have the private key in your pocket, accessing the crypto is more complicated than it would be on a hot wallet. Don’t worry, I’ll explain…
How Transactions Work with Cold Wallets
If you want to access your funds in a hot wallet, all you have to do is pull out your phone or laptop and log into your account, and boom! You have access to your funds and can complete a transaction with the tap of a finger.
Cold wallets are different though. To access your funds using a cold wallet, you must:
- Plug your wallet into the laptop or other device you want to use
- Download a bridge program (a program that allows the connection between your wallet and your electronic device) onto your device.
- Allow the bridge program to make the connection to your wallet. Your wallet will only allow very specific data to pass through it. In other words, only crypto transactions can pass through it.
- Once the transaction is received, it signs it on the hardware wallet itself and sends it back to the bridge program. The private key never leaves the wallet.
Note: ALWAYS make sure the transaction you’re approving on the hardware wallet matches the transaction your bridge program is showing on your PC or other electronic device.
This process is much more complicated if all you wanted to do was send crypto to another person, or if you wanted to trade your crypto in some crazy dip.
With this being said, the overall lesson is this: if you want to store your crypto for the long term, use a cold wallet. If you want to trade or you’ll be using it regularly in transactions, cold wallets might not be the most practical option.
Best Cold Wallet Options
This is a very well known device within the crypto community because it was the first crypto storage device out there!
Trezor is considered one of the leading cold storage devices on the market. It is well known for its protection of cryptocurrency against physical damage as well as software compromises within a device you might plug it into.
It is a sturdy, simple device that does not allow for any software compromises to pass through it.
One of Trezor’s biggest competitors is the Ledger Nano S. Offering protection at a lower price. Its biggest advantage is the smaller size and larger compatibility.
It’s probably obvious from the look of it, but this device is not nearly as sturdy as a Trezor, so keep this in mind when purchasing this less expensive alternative.
Although relatively newer than its prior comparisons, KeepKey grew in fame due to its sleek and sophisticated design.
What differentiates the KeepKey the most from its competitors is its size, weight, and look. It is a much bigger wallet. The price tends to be lower for this one too. As far as compatibility, security, and storage, it is quite similar to the Ledger and Trezor.
KeepKey also supports a smaller variety of cryptos in comparison to its prior two competitors. Also, it has received some negative reviews on quality and its customer support.
With the continuing growth of cryptocurrency popularity, more people are looking into the best wallet options for holding crypto. With the increase in customer demand, more wallet options will continue to appear.
Although these wallets may cost money in comparison to having a free hot wallet, the added offline security is a great benefit to have.
When purchasing any of these wallets, however, ALWAYS purchase them directly from their website. Do not purchase them through a third party seller. There have been cases of fraud reported by people who bought hardware wallets on eBay and sometimes Amazon. I would never advocate for running this risk, as it could result in the irreversible loss of your crypto.
Have you used a hardware wallet? What feedback do you have on them? Do you have any questions? Please let me know in the comment section below!