Cryptocurrency security is a critical issue for anyone who invests in and trades digital currencies. Investors must first make an important choice about the wallets where they keep their cryptocurrencies: Cold Wallett and Hot Wallet. Among these options, we answered the questions of Cold Wallet, what it is, how to use it and what are its types in our article.
Cold Wallet and Hot Wallet difference
If you buy cryptocurrencies and want to store them yourself, you can store your crypto assets using a hot wallett, cold wallet, or a combination of both. Hot wallets are connected to the internet and are at risk of online attacks. However, thanks to their connectivity, they work faster and make it easier to trade cryptocurrencies. Cold wallets are usually not connected to the internet. Therefore, although they are considered more secure, they are less useful.
What is a Cold Wallet?
Cold Wallet is the general name given to offline wallets used to store Bitcoin and other alternative cryptocurrencies. Hardware wallets come in the form of physical electronic devices. They use random number generators to generate public and private keys.
Cold wallets do not have an internet connection, so they are more resistant to cyberattacks, unauthorised access and vulnerabilities. Funds in cold wallets can only be accessed by people who know the private key. In this sense, the account holder can keep his funds safe as long as he does not share the secret key code given to him with another person. Physical wallets become inaccessible even to the owner if the key code is lost.
What are the types of Cold Wallets?
Cold wallets are physical electronic devices that use a random number generator (RNG) to generate public and private keys. The keys are stored on the device itself, which is not connected to the internet. Storage in hardware creates a type of cold wallet without a connection and is considered one of the most secure options for storing cryptocurrency.
While these wallets offer higher levels of security against online attacks, they can pose risks if the firmware implementation is not done properly. Also, hardware wallets tend to be less user-friendly and funds are more difficult to access compared to hot wallets. Some web wallett service providers also allow hardware wallets to connect to their web-based interface.
In addition to hardware wallets, paper wallets are also accepted as one of the cold wallet types.
Hardware Wallets
If you plan to store your crypto assets for a long period of time or if you hold a large amount of cryptocurrency in your hands, you may want to consider using a hardware wallett. Most hardware wallets allow you to set a PIN code to protect your device. Also they allow recovery key that can be used in case your wallet is lost.
Paper Wallet
A paper wallet is a piece of paper on which a crypto address and private key are physically printed in the form of QR codes. These codes are then scanned to execute cryptocurrency transactions. A paper wallet is essentially a cold wallet with no additional management features. You control the keys yourself. Your wallett is not connected to the internet.
While paper wallets were once considered one of the best ways to secure large amounts of cryptocurrency, they have been eclipsed by other cold wallet methods.
How to use a Cold Wallet?
If you want to keep your cryptocurrencies on a cold wallet due to security concerns, you can choose between paper or hardware wallets.
To use a paper wallet, you can take advantage of many different crypto exchanges. As well as paper wallet creation tools specially created for this job. It is recommended that the paper wallet creation process be done offline for cyber security reasons. It is important for the security of crypto assets that the created paper wallett s well stored and not shared with anyone.
Due to its flaws, the use of paper wallets is now considered dangerous and is not recommended. However, if you still want to use it, it is very important to understand the risks. One of the biggest flaws of paper wallets is that they are only suitable for sending the entire balance at once, not part of it.
Technically, if you transfer your paper wallet private key to a desktop wallet and spend only part of the funds, the remaining funds are sent to an ‘exchange address’ automatically generated by the Bitcoin protocol. By checking this change address, you risk losing your crypto assets if you don’t set it manually.
Hardware wallets, on the other hand, are a better electronic version of the paper wallet in terms of security and usability. They guarantee that private keys do not leave the device. The keys are kept in a special place on the device and removal of the key is not allowed.
Since hardware wallets are offline, they must be used with another device. Thanks to their high-security structure, hardware wallets do not get viruses from computers and smartphones and do not leak their private keys.
Most popular hardware wallets
Cryptocurrency investors around the world prefer the following wallets to store their assets.
- Trezor Model T
- Trezor One
- Ledger Nano S
- Ledger Nano X