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What Is A Cold Wallet?

Please Pick Your Crypto Level
6 min read

What Is A Cold Wallet?

As a quick reminder, wallets aren’t actually involved in storage: all the cryptocurrencies are recorded (or “stored”) publicly on their respective blockchain network. Wallets are points of access to one’s cryptocurrencies, in the same way that logging in to one’s email account allows one to access email messages that are stored on a distant server. To extend this analogy, a wallet’s public key is comparable to an email address and a wallet’s private key is similar to a password for an email account. Moreover, in the same sense as having one’s email account accessed by someone else, someone with access to one’s cryptocurrency wallet – via one’s private key – has full control over managing the funds therein and the situation would be no different than if they had broken into a personal storage vault. The only difference worth noting is that losing a cryptocurrency wallet is not the same thing as losing a physical wallet – with a lost physical wallet, any cash in there is gone for good. However, if one has lost, let’s say, a cold wallet, one has merely lost an access point to one’s cryptocurrencies – if there is a second cold wallet with the same private key, the funds can easily be re-accessed. WHAT ARE COLD WALLETS? Cold wallets are not connected to the internet, which means they are safe from internet-related hacks. Cold wallets are only connected to the internet in order to transfer crypto, likely into one’s hot wallet, and then is swiftly disconnected afterward. As one can imagine, a cold wallet is like a savings account and is used as a long-term storage method for a large volume of one’s cryptocurrency holdings. Anyone owning a significant amount of any type of cryptocurrency would be doing themselves a disservice in not owning a cold wallet and putting it to use. The fundamental technology is no different from existing computer storage hardware – the novel component is in the application of this hardware to a cryptocurrency use case, along with several tweaks. WHY ARE COLD WALLETS RELEVANT? Just to be explicit: malware attacks are very real. All the major operating systems for devices – whether desktop or mobile –  have known loopholes that can be exploited. Tactics like trojans or keyloggers can be used to steal one’s private key and, in which case, the cybercriminals will be walking away merrily with one’s cryptocurrency funds. We need only to recall the disaster that was the Mt. Gox hack to understand the necessity of investing in cold wallets. WHAT TYPES OF COLD WALLETS ARE THERE? Paper wallets and hardware wallets are the two main types of cold wallets; however, for our purposes here we will be focusing on hardware wallets. There is little else to comment on paper wallets beyond that they contain one’s private key written or printed on a piece of paper: they are naturally unhackable but, simultaneously, they are easily lost, damaged, or destroyed. It would be worthwhile – and cheap – to have a paper wallet backup for every hardware wallet one possesses, stored in a secure place like a safe. HARDWARE WALLETS  Now we’re ready for the main topic of discussion – in the majority of cases when people talk about cold wallets, they’re referring to hardware wallets. At a starting price of roughly $100 USD, they are worth every penny if one owns a sizeable amount of cryptocurrency. They are relatively similar to USB memory sticks and external hard drives, but with extra security features and some functionality tailored specifically for use as a wallet. For instance, the highest tier hardware wallets – brands like Ledger, Trezor, and Keepkey – prioritize ease of use with a physical button on their devices to authorize transactions. In any case, the main feature of hardware wallets is that one’s private key never leaves the wallet: internet hacks do not affect them. CORE FEATURES TO LOOK FOR IN HARDWARE WALLETS As with any purchase, understanding what features matter for hardware wallets will enable us to make better-informed purchasing decisions. The elements to consider are: (1) price, (2) supported cryptocurrencies, (3) security, (4) display screen, (5) design, and (6) software wallet compatibility. CORE FEATURES | PRICE Fortunately, as more competition has emerged in the hardware wallet space, prices have leveled out to approximately $100 (USD) for the flagship wallets. This is no different than how multiple car manufacturers end up having cars in the same category – for example, family sedans – with relatively similar prices. As such, one could enter the hardware wallet purchasing arena with the expectation to part with at least $100 USD. CORE FEATURES | SUPPORTED CRYPTOCURRENICES  Not every wallet supports all available cryptocurrencies and most only support a slim fraction of all possible cryptocurrencies. With this in mind, the core feature that we need to consider after the price is the number of blockchain tokens that each wallet supports. This means that one’s personal approach to cryptocurrency investing will largely determine which wallet one uses, especially considering the general uniformity of price. Those into day trading with a wide spread of cryptocurrencies will be restricted to using only those wallets that support a large variety of tokens; conversely, those who make standard long-term bets on the perceived “blue chip” cryptocurrencies like Bitcoin and Ether will end up having more flexibility in the types of wallets they can use. CORE FEATURES | SECURITY It may sound convoluted to bring up security for products that are inherently security-oriented – like talking about sweetness with candy – but there are various items under the umbrella of “security” that need to be considered. The first layer to consider is the core chip – the microcontroller – that runs the device. We would not recommend diving too deeply into this area without some background knowledge but a simple test is to gather information on a chip’s Evaluation Assurance Level under the Common Criteria guidelines. For instance, the Ledger Nano S has a level 5 (EAL5+) rating under the CC framework. The second layer consists of password access to the device, where the core elements that should be present is at least PIN entry – if someone manages to steal or find your cold wallet they won’t be able to use it without its PIN. Look also for passphrase entry if an extra wall of defense is desired, in addition to the PIN. A final layer to look for is variations on password recovery features. It’s inevitable that passwords, PINS, and passphrases will be forgotten so make sure that you invest in a wallet that can help you recover access to your cryptocurrencies should the very human failings of memory occur. This may be unsavory to mention but do consider the possibility of unforeseen events like strokes or concussions that could cause one to permanently forget one’s passwords. CORE FEATURES | DISPLAY SCREEN The presence of a display screen on a hardware wallet enables us to interact with the wallet without having to connect to a computer – remember that any internet-connected computer is a potential security risk. As such, we can perform needed actions like back-ups without computer access if the wallets have display screens. Moreover, an added benefit is that the presence of display screens allows us to review transaction data – wallet addresses and amount of funds – right on the wallet without, again, having to connect to a computer. In short, display screens play a role in security by allowing secure back-ups without a computer, while simultaneously adding to the general ease of use. CORE FEATURES | DESIGN When we say “design” in this context we are referring to the overall size specifications and how that relates to lifestyle considerations, namely portability. To be fair, most of the hardware wallets are portable but portability comes in varying degrees. The Trezor wallet, in particular, can fit in one’s pocket while the KeepKey is definitely not pocket-portable. This plays into lifestyle elements regarding how one invests and trades cryptocurrencies: it’s easy to imagine a day trader needing a portable hardware wallet to carry around 24/7, while we can alternatively imagine a less frequent purchaser of crypto, using a KeepKey at a home office desk on a weekend. CORE FEATURES | SOFTWARE WALLET COMPATIBILITY Naturally, a hardware wallet does not operate entirely on its own – hardware needs software just as a body needs a brain. Software wallets help us interact with the hardware wallet in the instances where we are connecting to a computer and the internet in order to make a transaction. When we’re talking about the higher tier hardware wallet vendors, most have their own software that we’re able to use. However, hardware wallets also offer compatibility with existing third-party wallets and it’s important to understand which specific third-party software wallets one’s hardware wallet is compatible with. This is especially true for day traders who may have peculiar user experience preferences that certain software wallets provide. PROMINENT HARDWARE WALLET BRANDS There are three hardware wallet brands that are generally recommended in the cryptocurrency community: (1) Ledger, (2) Trezor, and (3) KeepKey It is not relevant to do a side-by-side comparison for all three since their product specs are constantly evolving. Our recommendation is to check out the websites and product specs of all three vendors at the specific moment when one has decided it is the right time to buy a hardware wallet. In this way, one will be presented with only the most relevant information to inform one’s purchasing decision.
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