If you are going to take crypto seriously, you’ll want the best cold wallet you can get your hands on. Ask any expert, and they’ll likely tell you that cold wallets offer the best security because they store your private keys in an offline environment.
Because storing data online renders a wallet more vulnerable to cyber attacks, cold storage is considered to be more secure than hot storage. This is why cold wallets are considered the best choice in the cryptocurrency space.
How Does a Cold Wallet Work?
At their core, crypto coins and tokens are data. This data doesn’t live in your crypto wallet, it’s stored on the blockchain. This is, in essence, a distributed ledger. To learn about this in detail, check out our article on how cryptocurrency is actually stored.
The way digital assets are stored means crypto wallets are not wallets in the traditional sense. They are more like tools for accessing the data (coins and tokens) that belong to you. To function, they use a combination of cryptographic keys, one private and the other public.
The public key represents your wallet’s address on the blockchain. It is what you give to people looking to send you crypto coins and tokens.
The private key, on the other hand, is what lets you access all the coins and tokens sent to your wallet address. It is the master key to all your assets on the blockchain. When transferring assets from your wallet to another, it acts as the digital signature, signing off transactions.
This is why it is important to secure your private key. Anyone who gets their hands on it can access your crypto assets as they please. And the world has more than its fair share of malicious actors trying to steal private keys.
Among these are online hackers who target private keys stored online. So, to stop that from happening, cold storage solutions look to store your private keys offline at all times. Transactions are signed in an offline environment before being broadcast online. This ensures that hackers marauding within the network never see the keys.
It’s also important to note that all cold wallets are non-custodial wallets. This means that you control your private keys.
What Are the Different Types of Cold Wallets?
Various crypto wallets take different approaches to cold storage, giving us different types of cold wallets. These are:
Paper Wallets
Paper wallets are the simplest form of cold wallets. They are papers on which public and private keys have been printed, usually in the form of a quick response (QR) code that is scanned to initiate a transaction.
A paper wallet is fairly easy to create. You’ll need a website or app that lets you generate public and private keys, which you then print out. But in the spirit of cold storage, the entire process has to be done offline. Neither the device you use nor the printer it is connected to should be connected to the internet.
But you should be aware of the drawbacks of this medium before doing any of that. The biggest of these is that paper is fragile. It is easily torn and damaged. If that happens, you may lose access to your keys, and thus, your assets. The same is true if you lose the piece of paper.
Thus, paper wallets have largely fallen out of favor in the crypto space. Many people have, instead, turned to hardware wallets for their cold storage needs.
Hardware Wallets
Hardware wallets are physical, electronic devices that store private keys offline. There is a whole industry dedicated to manufacturing and improving them. It is dominated by two brands, Ledger and Trezor.
During setup, a hardware wallet gives you a seed phrase, which contains your public and private keys. You’ll also be required to set up a PIN or password to prevent unauthorized access.
On their own, hardware wallets cannot connect to the internet. They are referred to as air-gapped wallets. Thus, you will need to connect the wallet to a phone or computer to use it.
This is relatively easy because most hardware wallet devices look and function like a USB drive. All you need to do is plug it in. There are also a few wireless models that connect to a phone/computer via Bluetooth.
Either way, the private keys are generated within the hardware wallet by a secure smart card that is always offline. So, even when the phone/computer is connected to the internet, the keys remain out of reach of hackers.
However, that doesn’t guarantee that your assets cannot be stolen. There are other ways that you can lose your crypto, even with the secure cold storage offered by hardware wallets.
For example, since it is a physical device, your hardware wallet can be stolen. And if whoever has it gets their hands on your PIN, all they need to do is plug the device into a computer and enter the PIN to access your assets. Fortunately, this scenario can be avoided with the use of a passphrase.
Your assets will also be unsafe if an unauthorized person discovers your seed phrase. This is because they can use it to generate your keys and thus, steal from you.
Offline Software Wallets
There are also software wallets you can download on your computer/mobile device that store private keys offline. Examples include Electrum and Armory. Not all of them offer the option of signing transactions offline, so do your research before you go down this road.
You will not be required to keep your device offline to use an offline software wallet. In fact, like all software wallets, these require an internet connection to work. So, how do they keep your private keys offline?
The wallet is split into two platforms; one online and the other offline. When sending crypto, the online platform generates an unsigned transaction. This is then moved to the offline platform, where it is signed with the private key before being moved back to the online platform. Now, as a signed transaction, it is finally broadcast to the network.
Offline software wallets are, however, not as secure as hardware wallets. This is because the computer on which a software wallet is installed can itself be hacked. And since the keys are stored locally, the attacker may be able to get their hands on them.
Sound Wallets
Did you know you can store your keys as sound? I bet not!
Sound wallets are a way to store your private keys by encrypting and recording them in sound files on a compact disk (CD) or vinyl record. Once encrypted, the keys can only be deciphered using a spectroscope.
However, while novel, this form of cold storage is considered extreme. It’s also expensive since it requires the use of specialized components. Thus, very few people use sound wallets to store their keys.
Advantages and Disadvantages of Cold Wallets
The biggest advantage of cold storage is security. Compared to hot wallets, cold wallets are very secure because private keys are always offline, which keeps them out of reach of online hackers. But, there are disadvantages.
One of these is cost. While free solutions exist, the best cold storage solutions, i.e., hardware wallets, are manufactured commercially by companies. So, you have to purchase them. Hardware wallet prices start at $70.
The other disadvantage is convenience. Cold wallets are not nearly as convenient to use as hot ones. This is because they are not connected to the internet and thus, require additional steps to use.
For example, with a hardware wallet, you need to connect it to your phone/computer before you can sign transactions, which takes time. It gets even worse with paper and sound wallets, which require scanning QR codes and decrypting sound waves respectively.
For this reason, people who perform a lot of transactions (like crypto traders) try to avoid cold storage solutions. They, instead, prefer to hold their assets in hot wallets which offer more convenience when trading.
The last disadvantage is the risk of loss, theft, or damage. Except for offline software wallets, cold wallets store private keys on a physical medium of some sort. This medium can suffer physical damage or get lost or stolen.
To prevent this, it is important to handle your cold wallet carefully and store it somewhere secure. This location should be protected from the elements and would-be thieves. Thus, something like a safe is perfect.
Best Cold Wallets
The best cold wallets are hardware wallets. This is because compared to paper, sound, and offline software wallets, hardware wallets are easy to use, have advanced security features, and support multiple cryptocurrencies. Here’s a look at the best 3 cold wallets.
1. The best overall cold wallet
The best overall cold wallet comes from Ledger. Known as the Ledger Stax, this hardware wallet is Ledger’s latest and most advanced cold storage product. It supports more than 5,000 crypto coins and tokens across dozens of blockchain networks. It can also be used to store non-fungible tokens (NFTs).
The Ledger Stax looks like a small, palm-sized touchscreen device. It has around the same thickness as a stack of five credit cards and uses the world’s first curved E Ink touchscreen for its display area. This area can be customized with a lock screen photo or NFT that is always on.
The device can be connected to Windows, Android, macOS, and iOS devices via USB-C or Bluetooth. It also has wireless charging. Buying one will set you back $279.
2. The best budget-friendly cold wallet
The best budget-friendly hardware wallet is the Trezor Model One. Going for only $69, the device supports more than 1,000 crypto coins and tokens. It has a small OLED display and two buttons for navigation. This display, which can hold up to six lines of text, is used to show all the details a user needs to verify a transaction.
The Trezor Model One connects to computer and mobile devices via a USB-A cable. It has no wireless capabilities, meaning you will need an OTG adapter to use it with mobile devices. Note that only Android is supported for these devices; support for iOS is yet to arrive.
3. The best cold wallet for beginners
The best hardware wallet for someone just getting started with cold storage is one that is affordable, easy to use, and has a good reputation for security. There are many contenders for this, including the just-discussed Trezor Model One, but the Ledger Nano S Plus takes the spot.
Retailing for only $79, the Ledger Nano S Plus is an entry-level hardware wallet from one of the most reputable brands in the market. It supports 5000+ crypto assets, including NFTs, and has enough memory to have up to 100 apps installed simultaneously.
The wallet can be connected to macOS, Windows, and Android devices via USB-C. It has a button for navigation and a small screen for displaying information needed to verify transactions.
Troubleshooting Cold Wallets
Some users eventually encounter issues that make it difficult or even impossible to use their hardware wallets. The most common scenarios involve physical/water damage to the device, losing the wallet’s seed phrase, or forgetting its passphrase.
In such situations, there is little the user can do except contact a wallet recovery expert. This is a cryptography and data recovery professional – like Professional Crypto Recovery – who specializes in helping people recover their crypto.
Professional Crypto Recovery has been in the IT industry for more than 21 years. We have a proven track record of success in helping people recover their cold wallets quickly, safely, and affordably. Contact us to get your recovery started now.
FAQs
Cold Wallets vs. Hot Wallets: Which Is Better?
Cold wallets are the most secure option when it comes to storing crypto assets. However, whether they’re the best option for you depends on your specific needs. Do you transact/trade often? Are you looking to interact with decentralized finance (DeFi) protocols regularly? In such cases, hot wallets are the better option.
To solve this dilemma, many crypto investors use both hot and cold wallets. Hot wallets are used to hold those assets that are traded/transacted regularly while cold wallets are used to securely hold assets long-term.
Can a Cold Wallet Be Hacked?
Cold wallets store their private keys offline to protect them from online hackers. However, that doesn’t mean they cannot be hacked through other means.
For example, if the device itself is stolen then an unauthorized party can steal your assets. This is easily done if the thief manages to also steal your PIN. But even without the PIN, they could try a number of techniques to access your wallet.
Does Losing a Hardware Wallet Mean Losing Your Assets?
No, not necessarily. Your hardware wallet doesn’t store your crypto assets; it stores your private keys while your assets remain on the blockchain. This means that if you lose your hardware wallet, your assets are still on the blockchain. Fortunately, there is a way to access them.
If you still have your seed phrase, you can restore your wallet in a new hardware wallet or a supported hot wallet. Because it has the same private keys, this new wallet will let you access your crypto assets.