Unlike a hot wallet, which is connected to the internet and could even be on the internet, a cold wallet is offline. Cold wallets are usually specific hardware like a USB designed to store cryptocurrency.
Like a hot wallet, there are public keys — such as a crypto address for the cold wallet — and private keys that the wallet owner uses to access their assets. However, the private keys for a cold wallet aren’t stored on the internet like they are for a hot wallet.
When making an exchange with crypto assets, a signing process using keys takes place. With a hot wallet, this process takes place entirely online.
But a cold wallet allows these transactions to take place offline. The transaction starts online, but then it’s moved offline into the cold storage where it can be digitally signed. Once it’s signed in an offline environment, the completed information can be sent back to the online network. The main point is that the private key used to sign the transaction doesn’t end up anywhere online.
Who Cold Wallets May Be Suitable For
Cold wallets are ideal for those who want to store a large number of crypto assets in a more secure environment. For example, I have a cold wallet and a hot wallet. I keep some of my coins in a hot wallet for easy use online. My hot wallet makes it easy to buy coins. However, the bulk of my crypto assets are transferred to a cold wallet, where they are kept offline.
Some exchanges that provide hot wallets, such as Binance, limit the storage capacity to encourage you to move some of your assets offline and into a cold wallet to increase security. A cold wallet offers a good solution for storing some of your cryptocurrencies safely. Just be aware that if you lose your cold storage or you forget your private keys, you might not get those coins back.
Types of Cold Wallets
You can actually use paper as a cold wallet. With this, you write down your keys on a piece of paper. It’s also possible to print out a page with a QR code that allows you to sign a transaction from your cold wallet.
But there are also specifically designed hardware wallets that look similar to USB drives or smart cards. Some of the most-used cold wallets include:
Trezor — This cold wallet supports a large number of cryptocurrencies and has unlimited storage. On top of that, it’s easy to interface with exchanges and can be compatible with some of the hot wallets. Models cost as little as $60 or as much as $180.
Ledger — Unlike Trezor, Ledger doesn’t come with unlimited storage. However, Ledger has Bluetooth capability in addition to the ability to connect to a smartphone or desktop via cable. The more expensive Ledger wallets cost less than the highest-priced Trezor. But some Ledger models start as low as $60.
There’s a lot to think about when investing in cryptocurrency. Before you can make a final decision as to which type of wallet is best, you should decide how you want to invest. For example, with Wealthfront, you can now gain exposure through two cryptocurrency funds: Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Trust (ETHE). This allows you to invest in crypto without having to buy it individually.
From there, you can take on the hot wallet vs. cold wallet. In many cases, it makes sense to have a hot wallet connected to the internet and keep a limited number of coins inside for ease of use. However, for security, use a cold wallet to store the bulk of your assets so they’re less accessible to potential hackers.