In this article, we will explain what cold wallets are and how they work. We will also briefly cover the cold wallet types available these days and their advantages and disadvantages.
Crypto Wallets – What Are They?
Crypto wallets are tools that keep your private keys, that is, the passwords that give you access to your cryptocurrencies.
Technically, they don’t store your crypto, as your holdings are always stored on a blockchain.
Instead, they safeguard the cryptographic keys you need to access your crypto holdings and make transactions. You could see them as a digital bank account for your cryptocurrency but without intermediaries.
Crypto wallets are broadly classified as cold and hot wallets. The main difference between them is that cold wallets are not connected to the internet, while hot wallets are.
What Is a Cold Wallet?
A cold wallet is an offline crypto wallet that stores the user’s crypto address and private keys, which is known as cold storage.
Cold wallets are considered to be safer than hot wallets since the signing keys are kept in physically isolated hardware devices that are not connected to the internet.
They work in conjunction with a compatible software wallet and are connected to the internet only when you want to use your crypto.
Types of Cold Wallets and How They Work
The main cold wallet types are hardware and paper wallets.
A hardware wallet uses a physical medium, typically a USB-like device, to store your private keys. Trezor, Ledger Nano S, and KeepKey are the most popular hardware wallets.
To store your cryptocurrencies in such a wallet, you will have to send them from a hot wallet to your hardware wallet’s public address.
In case you want to send crypto from your hardware wallet to an exchange or a friend, you will have to connect it to the internet using the wallet’s dedicated software. Once you do so, you’ll just have to sign the transaction with your private key. The cold wallet will confirm the transaction in an offline environment.
Paper wallets are pieces of paper that contain the wallet’s address and a private key. Crypto cannot be accessed or stolen without a private key. That’s why such a wallet must be securely kept in a place where it cannot be easily found.
In case you want to send coins from a paper wallet, you will have to import the wallet into a hot one by scanning the private keys.
Cold Wallets – Advantages and Disadvantages
Cold wallets ensure a higher degree of security since they keep your keys offline and are connected to the internet only when you want to use your crypto.
They are non-custodial, which means that you are the only one to own access to your private keys and funds.
However, one drawback is that cold wallets may be impractical for everyday crypto usage and tend to be expensive. They can also be lost, destroyed, or stolen.