What Is A Cold Wallet?
A cold Wallet or a cold storage is a device that is used to store private crypto keys offline. It does not remain connected to the internet when not in use. As a result, it is secure from the digital threats that hackers, frauds, and scammers pose on the internet.
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A cold wallet for cryptocurrency is suitable for users willing to spend on an external device with enhanced security features. These wallets do not require feeding in the private keys in an online environment, making them safe from unauthorized access as opposed to digital wallets.
Table of contents
- What Is A Cold Wallet?
- How Does A Cold Wallet Work?
- Types
- Examples
- Advantages And Disadvantages
- Cold Wallet Vs. Hot Wallet
- Frequently Asked Questions (FAQs)
- Recommended Aricles
Key Takeaways
- A cold wallet is a physical device that stores private crypto keys in an offline environment. It is used to secure private keys from any digital threat that scammers and hackers pose online.
- In a cold wallet, the private keys are not entered when the device is connected to the internet. As a result, even if the hackers come across the transactions, they cannot access the private keys.
- These wallets are expensive and are susceptible to getting lost, misplaced, stolen, or damaged.
How Does A Cold Wallet Work?
A cold wallet is a physical device that stores private crypto keys in an offline environment. It stays disconnected from the internet when not in use, thus making it secure from the vulnerabilities to which the internet is susceptible. The user can connect it to the internet through Wi-Fi, a USB device, or a QR code or only when using it.
In a cold wallet for crypto, an online transaction is temporarily moved to an offline wallet where the user digitally signs it before transferring it back to the online network. This ensures that the private key is not connected to an online server during the signing process. As a result, a hacker cannot access the private keys if they find the transaction.
Types
The types of cold wallets are as follows:
#1 – Hardware Wallet
This wallet is a physical device to secure the user’s private keys offline. The keys in these wallets remain hidden even during transactions. These wallets create the private and public keys offline, which. Therefore, they remain unexposed to the possibility of having malware due to the internet connection. These devices are kept separate from the internet, and thus, they are not easily accessible to hackers.
#2 – Paper Wallet
This wallet is a piece of paper where users can print their private and public keys. These devices usually come with a QR code which is easy to scan for quick and seamless transactions. However, these wallets can be easily destroyed, stolen, or misplaced, so the user must always keep them secure. Furthermore, they are always at risk of being discovered by someone who can see the private keys and get access to the blockchain address.
#3 – Deep Cold Storage Wallets
These cold wallets are paper wallet types and are generally used by individuals who rarely need to access their wallets. The user can store crucial information in these wallets so that security gets more priority over easy accessibility. An example of deep cold storage is a memory card containing all the private keys, which are locked up in a safety deposit box put away in a bank safety locker.
Examples
Let us understand the concept with the following examples:
Example #1
Suppose Richard planned to invest in some cryptocurrencies. He went on an exchange and purchased 100 Bitcoins and 300 Ethereum coins. Richard wanted to transfer those coins to a wallet for their safekeeping. He bought a hardware wallet online, which cost him around $100. He followed the instructions and moved all his purchased cryptos into the wallet. Richard was required to only enter his private key into the hardware device, which remained disconnected from the internet when not used. This is a cold wallet example.
Example #2
The hardware wallet market size is expected to grow at a 24.2% CAGR rate from 2022 to 2030. The global hardware wallet market had an estimated value of $245 million in 2021. It is anticipated to grow to $1,725 million by the end of 2030. Europe’s market is estimated to reach $625 million in 2030 while growing at a 25.7% CAGR rate. It has the world’s second-largest hardware wallet market. This is a cold wallet example.
Advantages And Disadvantages
The advantages of cold wallet storage are as follows:
- The private key is not exposed: In these wallets, the private keys stay unexposed to the computer or any online device. This ensures that the private key remains secure from being hacked or copied. In addition, these wallets only require the private key on the encrypted hardware device.
- Holding multiple cryptos in the same wallet: These devices can store several cryptocurrencies as digital currency only occupies a little space. Some wallets even allow users to store multiple cryptocurrencies in the same wallet.
- Enhanced security: These wallets come with pin protection which enhances the security of these devices. Furthermore, some wallets even come with additional security through biometric login.
- Not vulnerable to computer viruses: These devices are not connected to the internet when they are not in use. As a result, they are not vulnerable to computer viruses.
- Transaction verification requirement: These encrypted wallets verify all the transactions that are made. Thus, people can transact only when they have access to these devices.
The disadvantages of cold wallet storage are as follows:
- These devices tend to be expensive. The wallet price depends on how many crypto coins it can store.
- These wallets restrict the types of cryptocurrencies they can store. Most devices can only store leading cryptocurrencies, like Dash, Ethereum, and Bitcoin.
Cold Wallet vs Hot Wallet
The differences are as follows:
- Cold Wallet: These devices are not connected to the internet when not in use and store crypto offline. These wallets are external devices that cost between $50 to $250. They are more suitable for storing crypto for an extended period and have a storage capacity between 1,000 to 10,000 cryptocurrencies. They are more secure but vulnerable to getting lost, damaged, or stolen. These wallets need an extra step to be connected to the internet through a USB cable, Wi-Fi, or a QR code.
- Hot Wallet: Hot Wallet devices are connected to the internet through mobile phones or computers. They are generally free of cost, and some even provide interest on the stored cryptos. These wallets are more convenient and easier to use for trading cryptos. They have a storage capacity of between 1,000 to 10,000 cryptocurrencies. These devices are susceptible to malware and hacking as they remain connected to the internet. They can be accessed from multiple devices and are easily accessible.
Frequently Asked Questions (FAQs)
After buying and selling cryptocurrencies, one can transfer the amount to their wallet for safety. To move the crypto to this wallet, one must open their wallet and choose the cryptocurrency that they want to transfer to the wallet. Then they must click the “receive” button and follow the instructions to create a recipient address for the wallet. Finally, they must use the recipient’s address for transferring the crypto from the exchange to the wallet.
Yes, these wallets can be hacked. The wallets store crypto keys offline, leaving them vulnerable to malware. Hackers are known to carry out phishing scams by using someone’s account credentials and gaining access to their cryptos. Additionally, hackers physically interfere with these wallets. Furthermore, there have been several instances where customers received fraudulent wallets, allowing hackers to steal private keys and access the accounts.
To sell cryptocurrencies, one must use a cryptocurrency exchange. First, they must sign in to their account on the crypto exchange and select the “sell” option. Then they must choose the crypto they want to sell and feed in the amount. Finally, they must confirm the transaction details and complete the crypto sale.
Recommended Articles
This has been a guide to what is a Cold Wallet. Here, we compare it with hot wallet, its examples, types, advantages, and disadvantages. You can learn more about it from the following articles –
- Blockchain Wallet
- Cryptocurrency Exchange
- Ethereum vs Litecoin
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