Cold wallet: description, types, advantages and disadvantages

()

What is a cold wallet

Investments in cryptocurrency are growing every day and talk about the safe storage of digital assets is now more relevant than ever. There are many wallets at the disposal of users, among which cold storage wallets are considered the most secure.

The developers presented many cryptocurrency storage tools. All options differ in functionality, reliability and usability. All tools designed for storing and using cryptocurrencies can be divided into two main types: hot and cold storage wallets.

Today, cold storage wallets are considered the most reliable and protected method of storing crypto assets. The increased security of cold wallets is ensured by storing cryptocurrencies without an Internet connection, which makes them inaccessible to hacker hacks and thefts. For this reason, they are also called offline wallets.

It should be noted that remote storage from the network makes it difficult for the holder to access coins, but if there is no need to check the wallet and complete transactions on an ongoing basis, this method of saving assets will be quite convenient.

 Cold and hot wallet – what is the difference

The main difference between hot and cold wallets is the way they store coins and connect to the Internet. Hot wallets have constant access to the Internet. Due to this, they have high mobility and make transactions easy. In the connection to the network lies the main vulnerability of hot wallets – they become available to hackers. And given the fact that transactions in the blockchain are irrevocable, and the cryptocurrencies themselves are anonymous and are not regulated at the legislative level, the funds will be lost forever.

Cold wallets store cryptocurrencies offline without a direct Internet connection. Attackers cannot reach them, therefore, in all history, there has not been a single case of hacking a cold wallet.

 If we compare cryptocurrency wallets with real-life examples, then hot wallets are wallets that provide quick access to money, but at the same time can be lost or stolen. And offline wallets are reliable safes in which you can either put or take money, but for this you need to perform certain actions, enter a secret combination (code).

Of course, hot wallets are more convenient to use, but you should not store large amounts in them, just as in real life no one carries several thousand dollars in a purse unnecessarily.

How to choose an offline cryptocurrency wallet

The category of cold wallets includes all cryptocurrency storage methods that work without access to the Internet:

  • Special hardware devices;
  • Paper wallets;
  • Fragmented keys;
  • Addresses using multi-signature;
  • Offline transaction signatures.

Any offline cryptocurrency wallet is a sufficient storage method, but each of them has its advantages and disadvantages. Before deciding on a choice, it is worth considering the options for offline storage in more detail, and only after you have already made a choice in favor of a specific method.

Hardware wallet

Hardware wallets are modern reliable ways to store cryptocurrencies. These are small devices specially designed for these purposes that resemble a keychain and can fit seamlessly in your pocket.

Many experts are convinced that this is the most reliable way to protect their cryptocurrency assets, because in addition to the lack of access to the network, wallets are also protected by a secret SEED phrase and PIN code.

Ledger Nano S can be called the most affordable and convenient to use among cold wallets. A network connection is established when connected to a PC using a USB cable, while the funds still remain protected from theft, since each transaction must be confirmed by pressing a button on the device.

The keys and data of coins are stored in the device’s memory and never leave it, so the owner can be sure of their safety. If the wallet itself is lost or stolen, the finder will not be able to use the money without a PIN code, and the owner will be able to regain access if he remembers the SEED phrase that was set.

Pros:

  • Easy to use;
  • High level of protection;
  • Ability to recover lost wallet data.

Minuses:

  • The cost of such a device varies from 85 to 200 dollars.

 Paper wallet

It would be paradoxical, but in the technical age of cryptocurrencies, plain paper has become a reliable method of storage. The key written on paper allows you to save it without access to the network and accordingly protects cryptocurrencies from hacker attacks.

In order to create a paper wallet, you need to generate a public and private key to the wallet, and then write them on paper. The key can also be printed in the form of a QR code. For example, an offline Bitcoin wallet can be created by generating keys on the official cryptocurrency website, and then printed on paper and securely hidden.

In order to accept incoming transactions, it will be enough to transfer the public address to senders, and when it is necessary to complete an outgoing transaction, the wallet can be integrated into any other wallet system, but in this case it should be understood that it will turn into a hot storage wallet.

The safety of this method is largely dependent on the actions of the owner. The safety of the paper key should be approached with caution and choose a method in which an attacker can not get to it, but the owner himself will not lose it. Since paper is quite vulnerable to environmental influences, care should also be taken against moisture, fire and aging.

Pros:

  • Free and reliable.

Minuses:

  • Can be lost without the possibility of recovery;
  • Subject to physical damage;
  • After outgoing transactions, you need to create a new cold wallet.

 Transaction Signature Offline

The essence of this method is that the secret keys from wallets never come in contact with the Internet, but at the same time they are stored in digital form. This method is suitable for those who do not make a huge number of transactions daily and have access to two devices.

How to make a transaction signature offline:

  1. On a PC with the Internet and a hot wallet, they form a transaction without entering secret keys and authorization.
  2. The transaction file is copied to a second PC disconnected from the Internet and on which the private keys are installed.
  3. The transaction is signed on an offline device and returned back to the PC with Internet access.

The user can also create his cold wallet on a USB flash drive by storing private keys on it and signing offline transactions in the same way, but you should take care of the anti-virus system.

Pros:

  • Secret keys are stored without access to the Internet;
  • After the transaction, a cold wallet does not transform into a hot one, as is the case with a paper one.

Disadvantages:

  • Requires two PCs;
  • The operation requires time;
  • It is necessary to create backup copies of keys in case of failure of the second PC.

Multisigned Addresses

You can sign cryptocurrency transactions using several keys. This method is often used by companies when they decide that each employee individually does not have the right to personally spend company funds. Signing a transaction requires signing with several secret keys, which provides a high level of protection.

It should be noted that if any of the keys is lost, access can be restored, which makes backup unnecessary.

 Pros:

  • A reliable way to prevent theft;
  • Suitable for companies or user groups;
  • Access can be restored if the key is lost.

Disadvantages: none.

Fragmented Secret Keys

The wallet’s secret key is a cryptographic code, and cryptography often uses the Secret sharing technique to increase security. To perform this trick, many cryptographic protocols are used, but the most famous is the Shamir scheme, presented in the public domain.

The essence of this technique is that a secret key, usually consisting of a combination of 64 characters, is divided into several fragments. Each individual fragment does not represent anything of value and only by collecting a predetermined number of fragments together the key can be restored.

Suppose the owner of the key decided to divide it into five equal fragments, each of which is stored in a separate, remote from extraneous place. A transaction signature will be possible only if all five parts are assembled together, and if one or several parts are lost, the code can be restored by providing a predetermined number of other fragments.

This method is also suitable for group storage, since for signing it will be necessary for each participant to provide their part of the code.

Pros:

  • No backup required.

Minuses:

  • A high degree of protection is achieved only when storing parts of the key in different places.

How to create a cold wallet

A cold wallet is a pair of cryptographically secure keys:

  1. The public key (address) is used to receive or send coins. It can be transferred to third parties, because it does not carry any private information.
  2. Secret (private) key – password for access to cryptocurrency wallet. It must be securely stored and not transferred to third parties, since transactions are signed with its help.

You can create such a key pair on the official website of the desired cryptocurrency. There are also special services that allow you to generate wallet addresses, as well as generating QR codes for them.

The public address of the wallet can remain in the public domain. For example, printed on paper it can be stored in a purse or provided to other users in digital form as a payment attribute.

The secret key must be securely stored using one of the following methods:

  • Tucked away written on a piece of paper;
  • Fragmented into parts;
  • Saved on a PC or other device without access to the Internet.

In the case of the Ledger Nano S hardware wallet, the device will first need to be purchased, and then perform easy configuration according to the manufacturer’s instructions.

For Ledger and most models, the setup is reduced to generating a random Seed phrase necessary for data recovery, as well as setting a PIN code for additional protection.

 Ledger Nano S – the best offline wallet

Hardware wallets have not yet managed to get enough distribution, but among all methods of storing cryptocurrencies, they are the golden mean, providing both easy use and safe storage.

At the moment, a small number of hardware devices have been released and among all the Ledger Nano S wallet is considered one of the best. It is suitable for storing more than 1000 types of cryptocurrencies, has an attractive design and a high level of security. In addition to Bitcoin, it is also suitable for Ether, Dogecoin, Electroneum, Dash and many other popular cryptocurrencies.

Ledger Nano S hardware wallet is a multicurrency offline wallet that resembles a flash drive in appearance. For the convenience of users, the wallet is equipped with a portable display. The wallet has a combined stainless steel and plastic case, its weight is 16.9 grams.

Inside the device is equipped with chips, with encryption support, on which wallet data is stored. The private key never leaves the device, and the wallet itself is protected from viruses.

At the first start, the user will need to set a passphrase and password. Despite the small size and control with just two buttons, the device has a fairly extensive functionality and several developed applications that allow you to carry out any operations with cryptocurrency.

This model also has a competitive price. You can buy a wallet on the official website of the manufacturer, this is the best way to protect yourself from fakes. You can also find the device on eBay or at your local dealer.

Conclusions

Cryptocurrencies do not physically exist and they are expressed only in digital code, therefore cold-storage wallets, deprived of access to the Internet, protect cryptocurrency savings from the main danger – hacker theft. At the same time, it is important for the coin holder to understand that protecting his savings is closely related to the security of the private access key. There are many ways to keep the secret key out of network access, but each method somehow complicates the transaction for the user.

The most optimal option is hardware wallets designed specifically for these purposes and allowing transactions to be made quite easily, without risking key security. In other cases, it is recommended to combine storage methods and store most of the coins in a cold wallet, and those that are needed for daily use can be moved to convenient hot wallets.

How useful was this post?

Click on a star to rate it!

Average rating / 5. Vote count:

No votes so far! Be the first to rate this post.

Leave a Reply

Your email address will not be published. Required fields are marked *