Crypto Cold Wallets Explained

Many users tend to assume that since they can access their crypto assets online via crypto exchanges, crypto exchanges only store their users’ crypto assets in hot wallets. However, many exchanges nowadays store their users’ assets on both hot and cold wallets. These crypto exchanges keep a certain amount of crypto assets that are needed for withdrawals on their hot wallets and the rest in cold wallets.

So what exactly are cold wallets?

In this article, we will take a look at what are crypto cold wallets, the difference between cold and hot wallets, and are cold wallets better for crypto.

What Are Crypto Cold Wallets

There are two main types of crypto wallets: hot wallets and cold wallets. Hot wallets are digital wallets that store your cryptocurrency online. Cold wallets, on the other hand, also known as hardware wallets or cold storage, are physical devices that keep your cryptocurrency offline.

Individuals who choose to use crypto cold wallets prefer to keep and store their crypto assets somewhere that is not connected to the internet to reduce the probability of any online attacks.

Crypto cold wallets look similar to USB devices so you might be forgiven for mistaking crypto cold wallets for USB devices if you have not seen them before. Like USB devices, crypto cold wallets are portable and easy to use.

Crypto Cold Wallets Vs Crypto Hot Wallets: What’s The Difference

Here are some key areas in which cold wallets and hot wallets stack up against one another:

Security

Crypto cold wallets are commonly considered safer and less risky than their hot wallets counterparts because users’ crypto assets are stored offline which makes them less vulnerable to online attacks and hacking.

Cost

Hot wallets are typically free whereas hardware wallets can cost anywhere between $50 to $200.

Convenience

Crypto assets in cold wallets tend to be less liquid as users typically have to take multiple steps to access their crypto. Hot wallets, on the other hand, are always connected to the internet making them more convenient than cold wallets, especially for users who frequently buy and sell cryptocurrencies.

In addition, if you lose the pin and/or the seed phrase of your cold wallet, you can lose access to your crypto assets.

How Do Crypto Cold Wallets Work

One of the biggest misconceptions about cold wallets is that when a user uses a crypto cold wallet, he or she is storing their crypto assets offline in the wallet. However, cryptocurrencies always live on the blockchain and are never stored within the cold wallet itself. All a cold wallet does is store the private keys of users. And it is these private keys that users use to access their cryptocurrencies on the blockchain.

Here’s how crypto cold wallets work.

When a user wants to initiate a transaction, this transaction is first initiated online. The transaction is then temporarily transferred to a cold wallet where it is signed by the private key. After the transaction is digitally signed, it is transferred back online where the transaction is recorded on the blockchain.

Notice how at no point did the private key of the user come online when using a cold wallet. As such, this keeps the private keys of users safe from online hackers.

Should You Use A Crypto Cold Wallet

Storing your crypto assets is about striking the right balance between security and functionality and it is ultimately a personal decision. If you trade frequently, storing your crypto in a hot wallet or leaving it on an exchange might make more sense for you. On the other hand, if you tend to HODL your crypto, then buying and storing your crypto assets in a cold wallet might be a better option. You can even do both by allocating the amount of crypto you plan to trade on a hot wallet and the remaining amount to your cold wallet.

In short, the decision to use a crypto cold wallet should align with your own profile and needs.

List Of Some Crypto Cold Wallets

Ledger

Founded in 2014, Ledger makes non-custodial hardware crypto wallets, the Nano X and Nano S, for users who are looking to store their cryptocurrency offline. The company has offices in France and the US to create “secure solutions for blockchain applications.”

Trezor

Trezor is a hardware wallet developed by SatoshiLabs that is headquartered in Prague, Czech Republic. Trezor translates to “vault” in Czech which highlights the company's goal of providing users with wallets that come with top-notch security to protect their crypto assets.

Bitbox

A product of Shift Crypto AG (formerly known as Shift Devices AG), a Zurich-based company, Bitbox allows users to store a number of cryptocurrencies offline through the use of their hardware wallets. Bitbox wallet was first launched in 2015 and the wallet comes in a form similar to that of a small USB drive.

Keepkey

Keepkey was originally founded by Darin Stanchfield back in 2015. The company was later acquired by Shapeshift in August 2017 and the acquisition allowed Keepkey devices to be integrated with Shapeshift crypto exchange platform.

Ellipal

The Hong Kong-based company’s flagship product is the Ellipal Titan, which is the world’s first air-gapped cold wallet. Unlike wallets from Ledger and Trezor, the Ellipal Titan does not need to be physically connected to a computer via cable or Bluetooth. Instead, the cold wallet uses QR codes for data transmission.

Crypto cold wallets offer users an alternative method to store their cryptocurrencies besides storing them on hot wallets and on crypto exchanges. Like any other storage method, cold wallets have their own pros and cons. It is up to the individual to strike the right balance based on his or her own profile.

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.