- Hot wallets are like your normal everyday wallets.
- Cold wallets are like your savings account.
- Hardware wallets are still dependent on a third party.
- Paper wallets – The safest option.
- Paper wallets can be made quickly on the web.
- Are you a long-term investor? Then paper wallets are the way to go.
Digital wallets form the backbone of the crypto ecosystem since they store your public address and private key. Depending on what you want to do with your crypto, there are many wallets that you can choose from. Today let’s look into paper wallets. However, before we do that, let’s understand the difference between hot and cold wallets.
Hot Wallets vs Cold Wallets
What kind of investor are you, and what do you wish to do with your crypto? Are you a regular trader? If that’s the case, then hot wallets are your friend. If you are a long-term holder, then cold wallets will be the way to go. Think of hot wallets as your normal everyday wallets where you store some cash and cold wallets as your savings account. A smart strategy would be to store most of your money in cold wallets and keep the rest in hot wallets.
Let’s take a closer look.
What are Hot Wallets?
Hot wallets are any wallets that have a direct connection to the internet. So, your mobile wallets (Electrum), browser wallets (Metamask), and exchange wallets are all examples of this. Since they are in direct with the internet, they are vulnerable to hacks. However, because of the same reason, they are effortless and straightforward to use.
What are Cold Wallets?
On the other hand, you have cold wallets, aka wallets that are entirely offline. Because of this, they are entirely secure from online hacks. However, they are not that practical for regular trading purposes. Last time, we talked about hardware wallets that somehow bridge the gap between cold and hot wallets with relative ease.
However, hardware wallets do have a pretty major flaw.
The Biggest Problem With Hardware Wallets
At the end of the day, you are still dependent on a third party to create a robust wallet for you. If they make a mistake during production, then it doesn’t matter how cautious you are. You are still at risk. In fact, in September 2020, ShiftCrypto, the company behind BitBox hardware wallet, uncovered a major vulnerability in its two competitors – Trezor and KeepKey.
This vulnerability is known as a “Man-in-the-Middle” attack, and it would have allowed attackers to hold users’ cryptocurrency for ransom without being physically near the device. This was due to a bug in Trezo’s code. SInce KeepKey uses Trezor’s code it was vulnerable to the attack as well.
So, what exactly was the vulnerability?
Turns out that the Trezor code couldn’t verify the passphrase that the users entered. Verification requires the wallet to display the passphrase on the screen for the users to check manually. An attacker can potentially doctor the information sent by the wallet to the user by importing a new passphrase into the wallet.
Trezor has since corrected this error and clarified that the attack scenario was purely hypothetical and no funds were actually stolen.
Paper Wallets – The Safest Option
In a paper wallet, you generate your private key through a key generator. This, in turn, automatically creates your public address. These keys can then be printed in the form of QR codes.
So, why is this approach so secure? You are no longer dependent on a piece of hardware to be in control of your funds. You can print out your keys, laminate them and store them in a safe. It is that simple. If you are a long-term holder and want to keep your coins and not touch them, then paper wallets are the way to go.
How Do I Make A Paper Wallet?
In this example, we will be using Bitcoinpaperwallet.com. When you go to the site, you will see this key generator.
Just move around your cursor until the bar on the right (above “Skip”) fills up. When that happens, you will be taken to the next page, wherein you will get your public address and your private key in the form of QR codes and hexadecimal.
PS: Please never display your private address how we have done here. Your private address should be confidential.
PPS: The wallet we generated here is a Bitcoin wallet. Please don’t store any other crypto since you will end up losing your coins.
How Do I Import Funds From The Paper Wallet?
Now, let’s suppose that you need to use the funds kept in your paper wallet. Accessing them is not that straightforward. However, just follow these steps to make the process as pain-free as possible.
First, make sure that you have a desktop or mobile wallet. We are going to be using Exodus.
Here is how it works:
Step 1: In Exodus, open the wallet of the coin you want to import.
Step 2: Do you see the dots in the top-right corner? Click on them and choose “Move Funds.”
Step 3: Now, just enter or scan your private key.
That’s it, now you can migrate your funds from the paper wallet to your hot wallet with ease.
Paper Wallet Private Key Storage – Best Practices
Since key management is a crucial part of paper wallets, let’s see what all you can do to make this as efficient as possible.
- Store in a safe: Print your keys, laminate them, and store them inside a safe.
- Cloud storage: You can encrypt your key docs and store them in cloud storage.
- Engrave into Metal: Finally, you can engrave the keys into metal and keep them safe in a locker. Make sure that you choose a high-quality metal so that they don’t deteriorate over time.
You should store your private keys in multiple locations and spread your risk.
Alright, it’s quiz time!
Before you take the quiz, make sure that:
- You have a verified CoinSmart account (to get your reward if you successfully answer all the questions).
- You use the same email in the quiz that you use to register your CoinSmart account.