What is a Cold Wallet in Crypto?
Cold Wallet is an offline storage system that houses a person’s private keys. Since these wallets are not connected to the internet, they isolate the private keys and protect your funds from digital threats deployed via your internet connection..
How does Cold Storage Work?
It’s a common misunderstanding that any wallet – cold or hot – is where cryptocurrencies are held. In reality, all funds are stored in the blockchain network. The only way to access your funds is through your cryptographic private keys for your blockchain address – which is what a wallet holds for you.
Your private keys allow you to authorize and validate transactions from your address on the blockchain. The main function of cold storage is to protect your private keys and keep them offline; this is important because the majority of threats to crypto private keys are deployed via an internet connection.
Choosing Self-Custody for Digital Assets: Types of Cold Storage Wallets
There can be different types of cold storage wallets.
Paper wallets are just pieces of paper where you print your private and public keys. They typically include a QR code which is easy to scan for faster transactions. It is important to store paper wallets properly in a safe place, otherwise, they can be easily misplaced, stolen, or destroyed. The fact that they leave your private key completely visible also means they carry a risk that someone will see your private keys and be able to access your blockchain address.
Deep Cold Storage Wallet
Deep cold storage wallets are a subcategory of paper wallets, typically used by a person whose need to access their wallet is minimal: perhaps someone who is saving their crypto to be passed on after a set period, or after their death.
Without a need for regular access to the wallet, the holder can store their critical information (such as private key and recovery phrase)in a way that prioritizes security over access. This is why it is called “deep” storage. A simple example of deep cold storage can be a memory card that contains all your private keys and locks them into a safety deposit box which is safely put away in a bank. Some people store copies of their recovery phrases in multiple locations.
A hardware wallet is a physical device that secures your private keys offline. The advantage of using a device instead of a piece of paper is that the keys are concealed, even as you transact. A hardware wallet generates your private and public keys in an offline environment, meaning they are never exposed to the vulnerabilities of an internet connection.
Hardware wallets are isolated from the internet, so they cannot be penetrated by hackers looking to access your private keys. Some hardware wallets like Ledger Nano allow interaction with the smart contracts of web3 platforms.
If you lose your hardware wallet, your recovery phrase enables you recover funds, by directly linking you to your blockchain addresses independently of the device