A cold wallet is a wallet for storing crypto that is not connected to the internet, making it difficult to remotely steal the assets stored in it. They store a user’s address and private key securely while allowing them to view their portfolio without putting their private keys at risk. Cold wallets are the most secure way to store your Bitcoin or other cryptocurrencies. Most times, they require a bit more knowledge to set up.
With cold storage, the creation and storage of the private keys is done offline. Most crypto assets stored online are vulnerable to hackers, who actively attack online crypto wallets. Most exchanges and brokers store a large part of their cryptocurrency in cold wallets. This makes it impossible for hackers to steal the cryptocurrency from the wallets. Individual crypto owners can also store crypto in cold wallets as well.
One of the most secure forms of cold wallet is a paper wallet. A paper wallet is a cold wallet that you can generate from specific websites which support this feature. The website produces both public and private keys that you print out on a piece of paper.
Many people laminate these paper wallets and store them in their bank or in a safe in their home. Paper wallets have no user interface other than a piece of paper and the blockchain itself.
Another example of a cold wallet is a hardware wallet. A hardware wallet is typically a USB drive device that stores a user’s private keys securely. This provides more safety over hot wallets as it is unaffected by viruses that could be on one’s computer. Hardware wallet private keys never come in contact with your network-connected computer or potentially vulnerable software. These devices are mostly managed by decentralized communities. Hence, the community determines its safety rather than a company.
Hot Wallet vs. Cold Wallet
A cold wallet is more preferable if you plan to buy and hold cryptocurrency for a long period of time. But if you’re looking to buy and trade, or you want to cash out your assets after a little while, then a hot wallet is a better option to use.
Another benefit to hot wallets is ease-of-use. Because they are always online, there’s no need to transition between offline and online to purchase a cryptocurrency. To do so with a cold wallet would be quite difficult. You would need to find a device (typically a computer) in which to plug your cold wallet, then move the desired amount of cryptocurrency to a hot wallet, and then make your purchase.