You may have heard the phrase “keep your coins in a cold wallet” but what exactly is a cold wallet and why would you use it? The answer is quite simple. A cold wallet is a wallet that isn’t connected to the internet. The coins are kept in “cold storage” for safety.
To give you an idea as to why anyone would do this, first we just have to remember how cryptocurrencies work. Cryptocurrencies are digital currencies that are transferred over the internet. The coins are accessed via a private key, essentially a password, which allows you to transfer coins you have access to. Coins don’t actually exist anywhere except as a series of transactions in the ledger, but in simple terms they can be thought of as being held in the key. In order to use bitcoins, wallet software on your phone or computer, connects to the bitcoin network via the internet. It uses the private key stored safely on your phone, to sign the transaction authorising them to use the bitcoin you own to make payments across an encrypted network.
Hacking to steal bitcoin.
In order to steal someone’s bitcoin, it is essential to have the private key. This is the only way to steal bitcoin. Hackers may break into a person’s phone or computer via the internet to gain access to the key which they can then use to transfer your coins out to themselves. By having your private key on a device not connected to the internet, it resists theft by online hackers. Wallets that are on devices that do not connect to the internet are called cold wallets.
Cold wallets are the safest way to store cryptocurrencies since the coins are not online.
In contrast a hot wallet which may be kept on your phone to spend from easily. In the same way you only keep a small amount of cash in your pocket wallet, and not walk around with your entire lifesavings which is securely kept elsewhere.
Cold wallet options
There are 3 general types of cold wallets; paper wallets, offline computers and hardware wallets.
Paper wallets are exactly what they sound like. Since the the private key is simply a long password, it can be stored and kept safe on a piece of paper. The risk here is how fragile the paper is. If the paper is destroyed or the key not readable then the coins associated with the address are lost. Also, anyone that can see the key can copy/use/steal it . Paper wallets are considered 1 time use so are best for long term storage
Offline devices are computers or phones that are never connected to the internet. For private users this involves taking an old computer or phone, wiping it completely and installing a OS and wallet software from usb. This computer then generates the private and public key pair. The public key can be copied to a wallet on an internet connected computer and the address can then receive coins. However, the connected computer cannot send coins without the private key which is on the offline device. Typically, the connected computer will create the transaction. The transaction is then copied to the offline computer via usb, where it is signed with the private key. The signed transaction is copied back to the live computer, which then processes the transaction on the network.
A marginally less secure but more convenient method, uses a live OS booting from a usb drive, instead of a completely separate machine.
Hardware wallets are specialised devices to hold crypto currency. They connect to your computer via the USB port yet ensure that the private key is never vulnerable. This way they combine the safety of cold wallets along with the convenience of hot wallets. Popular hardware wallets include Trezor, Ledger nano and keepkey. It is generally recommended to purchase hardware wallets direct from the manufacturer to avoid, any kind of tampering of the device or purchasing compromised fakes.
Possibly the most popular hardware wallet, Created by SatoshiLabs , Trezor can make secure payments without exposing your private keys. By signing the transaction in an isolated environment and confirming the transaction on the device itself, it is possible to connect to a malware infected computer and still have full control of your funds in the device.
Trezor wallet is a browser interface for Trezor. Using the wallet software you can easily set up the device , manage your cryptocurrency assets, including sending and receiving transfers. Trezor is also compatible with a few other wallet software
Trezor also backs up your wallet to an offline recovery seed. A list of 12-24 words is created for you to write down on paper. This list of words allows you to recreate your wallet, recovering all the wallets, funds and transactions onto another trezor device if yours becomes damaged. This method of recovery was created by SantoshiLabs but is widely used, meaning the wallet can be recovered not just onto another Trezor but onto other compatible hardware wallets
One of the most respected and credible companies providing Hardware wallets, Ledger is based in Paris, with offices in San Francisco. Much more discreet than Trezor, the Ledger wallet looks like a small USB drive.
The ledger wallet comes in 2 varieties, the Nano S and the Nano X
When setting up your Ledger Nano s you will need to confirm a PIN code which will be needed each time you access the Nano S.
You will also be asked to write down your recovery phrase. Just like with the Trezor this phrase consists of 24 words which are used to recover your wallet. In case you ever forget your PIN, the Nano S can ask for a specific word from this phrase.
The Nano X also has a Bluetooth connection and can hold more apps that the Nano S.
However you choose to secure your funds, if you are going to be using Bitcoin or cryptocurrency, it is a good idea to have the funds that you don’t need on a day to day basis secured on an offline cold wallet