What is a cold wallet? How to choose and use a cold wallet?

A cryptocurrency wallet, often simply called a wallet, is a digital wallet used to store, manage, and use virtual currencies.  It comes in two forms: hot wallets and cold wallets. They can be used to receive, store, and transfer cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), Dogecoin (DOGE), and Litecoin (LTC).

I. What is a Cold Wallet?

A cold wallet is a type of cryptocurrency wallet that stores private keys offline. Because its private keys remain offline, a cold wallet is more effective in protecting against cyberattacks. During the use of a cold wallet, private keys are only transferred from an online device to an offline device through secure means, significantly enhancing asset security.

To address increasingly complex online threats and risks, most major cryptocurrency exchanges and wallet service providers offer cold wallet options to meet the security needs of modern cryptocurrency users.

With the increasing number of scams, viruses, ransomware, and malware threats in the cryptocurrency field, even ordinary users are increasingly opting for cold wallets instead of internet-connected hot wallets.

II. How Cold Wallets Work

The private keys in a cold wallet are generated offline by a computer or hardware device, usually based on a high-strength random number algorithm. The generated private keys are securely stored in a dedicated encryption chip or physical medium, such as a hardware wallet, offline storage card, or backed up in paper form as a QR code and mnemonic phrase.

These multi-layered security designs effectively prevent any unauthorized access attempts. Cold wallets usually also integrate additional access control mechanisms, such as PIN codes, passphrases, and biometric authentication, building another line of defense for the device itself.

During a transaction, the private key is retrieved from the offline cold wallet. The offline login process effectively resists online threats and provides additional security. After the transaction is completed, the transaction information is broadcast to the network via a connected device. Therefore, cold wallets are more secure and easier to manage.

III. Features of Cold Wallets

1. Cold wallets remain offline at all times, not directly connected to the internet, thus avoiding the risk of cyberattacks.

2. Cold wallets typically combine high-strength encryption algorithms with multi-factor authentication mechanisms to strictly manage access to encrypted assets.

3. By using dedicated security chips to store encryption keys, cold wallets effectively prevent hackers from remotely obtaining private keys, significantly improving asset security.

4. Cold wallets generally provide backup and recovery methods such as mnemonic phrases, ensuring that users can still recover their encrypted assets even if the physical device is lost or damaged.

5. The generation of private keys is entirely done in an offline environment, ensuring that the keys are isolated from online devices from the moment they are created, eliminating the possibility of online exposure.

IV. Types of Cold Wallets

1. Hardware Wallets

Hardware wallets are portable physical devices used to generate and store cryptocurrency private keys offline. They are specifically designed to store the private keys of cryptocurrencies. Some popular hardware wallets include Ledger, Trezor, and Bitkey.

Hardware wallets typically have a typical user interface, such as a screen with transaction options. Users need to enter a PIN code to confirm transactions. This is similar to an ATM machine.

Some hardware wallets work like USB drives and can be directly connected to a computer. Modern hardware wallets are now equipped with cameras that can read QR codes. Scanning QR codes is the safest option compared to connecting a USB drive.

Users can purchase these hardware wallets from retailers. Most of these wallets are waterproof and virus-proof. They support multi-signature verification for transactions, requiring multiple users to approve transactions by entering their private keys.

2. Offline Software Wallets

Offline software wallets are another popular form of cold wallet that does not connect to the internet. These wallets also create and store private keys offline, thus ensuring data security.

They work similarly to hot wallets, but require higher technical knowledge for setup and secure use. Therefore, offline software wallets are more suitable for advanced users. Electrum and Armory are examples of offline software wallets.

When using them, the user first creates an unsigned transaction on an online device, and then transfers it to an offline computer via a USB drive or QR code. After signing the transaction with the private key in the offline environment, the signed transaction is transferred back to the online device in the same way. Although the whole process is relatively cumbersome, it effectively guarantees transaction security. However, this type of offline wallet may not be suitable for frequent transactions.

3. Paper Wallets

Paper wallets are currently the most common method of cold storage because they are very simple to use and inexpensive. For example, a Bitcoin paper wallet can simply be printed out using a printer.

Users can also create wallet information and print it using a trusted QR code generator. When a transaction is needed, the key can be extracted by scanning the QR code on the paper. However, this may increase the risk of theft because the key is exposed to more software.

In addition, if the paper wallet is lost or damaged, you will not be able to access your crypto assets. Therefore, if you want to use a paper wallet, make sure you have a secure storage method and make backups. 

4. Deep Cold Storage

Deep cold storage refers to any method of storing private keys that is more difficult and requires more time and effort to retrieve. For example, you could lock a hardware wallet in a safe and then bury the safe in your backyard; or, you could entrust a professional third-party service provider to store the private key in a high-security vault with multiple authentication mechanisms.

In other words, deep cold storage means placing encrypted assets in a very difficult-to-access offline location – whether through physical concealment or professional storage protected by strict procedures. The trade-off is sacrificing convenience for a higher level of security.

5. Audio Wallet

An audio wallet is a relatively expensive method of storing and accessing private keys. It requires encrypting the private key, converting it into an audio file, and then storing it on a physical medium such as a CD or USB drive. The private key code saved in audio form can be decoded and restored using a spectrogram analysis tool.

V. Advantages and Disadvantages of Cold Wallets

VI. How to Use a Cold Wallet

If you don't already have a public and private key pair, you can create one using a cold wallet or a hot wallet. If you have already stored your private key in a cold wallet, you can skip this step and proceed to the next.

1. Signature Authorization

When you want to make a transaction using a cold wallet, you need to connect it to a mobile device or PC.  Generally, you will need to enter a PIN or password to unlock the device. After that, you can initiate the transaction.

2. Transaction Verification

After initiating the transaction, you can verify it directly on the device (or through the software on your mobile device or PC).  Once confirmed, the transaction will be completed. After the transaction is finished, the device will go offline when powered off, making the private key and mnemonic phrase more secure. Remember, do not connect to unknown apps. Otherwise, the cold wallet will be as vulnerable to attacks as a hot wallet.

3. Proper Storage

Although many cold wallets have features such as drop resistance, water resistance, and fire resistance, you should still protect it carefully and avoid damage caused by severe impacts or drops. Once lost, it is impossible to recover. It's also worth mentioning that even if you have purchased a hardware wallet, it's still necessary to back up your private key or mnemonic phrase using paper, a USB drive, or other methods.

VII. Differences Between Cold Wallets and Hot Wallets

Cold wallets offer enhanced security by storing private keys offline and disconnected from the internet. Therefore, they are particularly suitable for storing large amounts of cryptocurrency and serve as a reliable option for long-term storage. Although cold wallets offer significant security advantages, their setup process is often relatively complex.

Understanding how cold wallets work, mastering relevant best practices, and learning setup techniques will help you use these wallets more effectively. Choosing the right cold wallet can provide you with a secure and reliable way to store and protect your cryptocurrency assets.

Disclaimer:

For cryptocurrency tutorial purposes only, not investment advice. This website is not responsible for the actions taken by readers based on the information in this article.

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