Hardware Wallets Vs Cold Wallets: What’s the Difference?

Cold wallet, hardware wallet – it’s the same thing, right? Actually, these are two different things with different utilities and levels of security. And the most interesting part? Both can exist within the same Ledger device. Here we explain.

If you like interacting with web3 – participating in DeFi or NFT trading – you will have interacted with a smart contract with your crypto wallet. In fact, most blockchain applications are built on smart contracts. However, signing contracts on the blockchain is exactly as it sounds – you’re agreeing to specific terms and conditions. So, if you’re doing that with a wallet that contains valuable assets, you might want to reassess. 

You might already know that different crypto wallets offer different levels of security. For example, software wallets- those that connect to the internet- are inherently less secure than hardware wallets, which keep private keys offline. However, did you know that the way you use your hardware wallet impacts its security?

But before we get there let’s explore the most important questions. For example, what is a hardware wallet vs a cold wallet, and is there even a difference between the two?

Cold Wallets vs Hardware Wallets: What’s The Difference?

Both hardware wallets and cold wallets store private keys offline. But they aren’t the same thing. To keep it simple, cold wallets are a type of crypto wallet which doesn’t connect to any outside source. It merely holds assets and executes transfers back and forth from your other wallets.

On the other hand, hardware wallets are physical devices which store private keys and sign transactions offline. It’s true, that may sound familiar to a cold wallet. And, indeed, you might already know that hardware wallets are popular choices as cold wallets. But as similar as they sound, these terms are not interchangeable.

So how do they differ exactly? Well, let’s first go back to basics and explain what hardware and cold wallets are exactly.

What Is a Hardware Wallet?

Put simply, a hardware wallet is a physical device that stores your private keys; the ones that control your crypto account. While a hardware wallet can connect to your phone or computer, it actually keeps your private key in an isolated environment and signs transactions offline. This keeps your private key safe from online threats and scams.

While signing transactions securely is a hardware wallet’s core functionality, these types of wallets also offer a host of other benefits. For starters, they can generate multiple blockchain addresses or accounts across several different networks. Each of these accounts works separately, with a separate private key for each account, all protected by one easy to manage secret recovery phrase.

While many think that hardware wallets are purely for storage, it’s actually a common misconception. A hardware wallet can also faciliate your connection to web3 apps and services too. Put simply, a hardware wallet is a multi-faceted physical device, allowing you custody over your private keys while protecting them.

What Is a Cold wallet?

A cold wallet keeps your private keys offline and it never interacts with smart contracts. It’s a type of crypto wallet simply for storage purposes. The only thing a cold wallet does is transfer and receive assets. Since it doesn’t interact with anything potentially malicious, the account stays safe from online hackers and malicious transactions.

While cold wallets come in many shapes and size, such as paper wallets, sound wallets and many more, the most popular choice for cold crypto storage is a hardware wallet. It’s no guessing why they are so popular: they are accessible and easy-to-use, even for a beginner.

As a first option, it’s easy to use your whole hardware device as a cold wallet. To do so, you’d make sure you only ever send and receive assets from that entire device, leaving it as a sort of digital vault.

Setting up an Account as a Cold Wallet

For web3 explorers that want to interact with blockchain apps and services, creating a “cold wallet” within your existing hardware wallet may be a better option. To clarify, hardware wallets allow you to create multiple accounts. These accounts work independently on the device, meaning if you sign a malicious transaction with one account, your other accounts stay secure. With this knowledge, you can segregate your assets within the same device and designate one specific account as a “cold wallet”.

So how does this work exactly?

Well, all you have to do is set up a new account and only use it for sending and receiving assets. This guarantees it stays completely isolated from your other accounts. Imagine you connect to a third-party wallet and approve a malicious transaction on one account. In this case, your “cold wallet” would stay secure, as your hardware wallet protects the keys from both accounts separately.

In short, a cold wallet is a great way to guarantee you don’t accidentally sign away your most precious assets. Using this method, YOU determine whether a specific wallet address within your Ledger will be cold or not, by deciding if you will (or won’t) sign a transaction with it.

Cold Wallets vs Hardware Wallets: Why it Matters

Hardware wallets are secure from online hacks, but they can’t stop you from interacting with malicious smart contracts, liaising with bad actors or falling for social engineering scams. To explain, every time you sign a blockchain transaction, you’re accepting its terms and conditions. Thus, if you sign a malicious smart contract with an address containing valuable crypto and tokens, there’s not much you can do. The hacker may be able to drain your funds. 

Of course, there are a number of reasons you can end up signing something you shouldn’t have. For example, not all smart contract details can be fully displayed to users on a hardware wallet. In this case, you’re forced to agree to the interaction based on trust, rather than full knowledge of the contract conditions. Then even if you can see the contract details, not everyone knows what to look for either. If you want to be sure of what you’re signing, check out the Ledger Academy guide on smart contract functions.

Although there are several tools to help, signing smart contracts is unavoidable for Web3 users and even the most experienced Web3 user makes mistakes. So, staying secure is not just about keeping your keys offline, but also taking measures to ensure your exposure is minimized if/when you ever make the wrong call. Generating a “cold wallet” account on your Ledger device, and only using other accounts to sign approvals, will ensure that you keep your valuable assets safe.

Hardware Vs Cold Wallets: Segregating Your Assets Is Key

For each blockchain asset, you can create multiple, separate accounts. Each of these is isolated, and not impacted by anything that happens to the others. The result? If you make a mistake and sign a malicious smart contract with your active Web3 wallet, the rest of your assets will remain safe.

When you buy a Ledger, you can be confident your keys are offline at all times, but it’s up to you to decide how much of your crypto is exposed to smart contract risk. You are in charge, and we’re here to make sure you understand your options. Security isn’t about hoping for the best – it’s about being prepared for the worst, no matter how careful you are. By taking these simple steps, you’ll be free to explore the digital ecosystem with minimal worry!

Be bold, be safe, and stay educated