Cold Wallet

A crypto wallet refers to the ways to store virtual money, just like a bank account or a physical hiding place for non-virtual money. Virtual currencies can be stored in hot or cold wallets.

What is a Cold Wallet?

Many cold wallets (also called hardware wallets) are physical devices that look similar to a USB drive. This kind of wallet can help protect your crypto from hacking and theft, though it also comes with its own risks – like losing it, along with your crypto.

Cold wallets are not connected to the Internet, giving them an advantage over hot wallets in terms of security. Hot wallets, like any Internet-accessible service, are constantly vulnerable to Internet security risks like as hacks, phishing attempts, malware, viruses, and other assaults that might result in the irreversible loss of your cryptocurrency and digital assets.

Types of Cold Wallets

Hardware wallets entail storing your private keys or seed phrase on a hardware device wallet.
Paper wallets are, as the name suggests, tangible pieces of paper used to hold your private keys or seed phrase.
A less common cold wallet method includes etching or carving your private keys or seed phrase directly onto a piece of wood or metal.

Cold vs Hot Wallets - The Main Difference

Distinguishing between hot and cold wallets is straightforward. Hot wallets are connected to the internet and include accessible software for everyday use, such as purchasing goods and services or sending small amounts of crypto to others.

On the other hand, cold wallets are typically physical hardware devices stored offline for maximum security and used for long-term storage of large digital assets.

Security: Cold wallets are more secure due to their offline nature. Although hot wallets may have security measures in place, being connected to the internet increases the risk of hacking.
Convenience: Hot wallets offer greater convenience as they allow for quick sending and receiving of crypto. Cold wallets prioritize security over speed.
Cost: Hot wallets are often available for free, while cold storage using a hardware wallet may require a one-time investment. Alternately, a cold wallet can also be created for free by storing crypto keys on paper.

For a balance of security and convenience, many crypto investors use a combination of hot and cold storage. They keep a majority of their crypto in cold storage and use a hot wallet for daily transactions and smaller amounts.

Investing in a hardware wallet for cold storage is a smart consideration for the protection of your crypto assets. Its one-time cost is reasonable, especially for those making significant investments in cryptocurrency.

By combining both hot and cold wallets, the risk of crypto attacks can be reduced for both users and service providers. This approach provides the benefits of both wallets, with one used for trading and the other for secure storage.

While hot wallets were initially the more popular option, the use of cold wallets has been increasing in popularity. The integration of hot and cold wallets is also gaining recognition among crypto experts and service providers due to its numerous benefits.

The exclusive use of one type of wallet is becoming outdated as more people come to understand the value of combining hot and cold wallets for added security.

Phone as a Cold Wallet

Some individuals opt to use an additional phone as a cold wallet for their crypto assets. This secondary phone serves solely as a wallet and is only powered on during transactions. After connecting it to their main phone via Bluetooth or WiFi, they transfer a portion of their funds to a hot wallet. The secondary phone is then turned off and disconnected.

While this method is not as secure as a traditional cold wallet, it is considered a more convenient alternative to a hardware wallet and provides greater security compared to solely using a hot wallet.

Is a Wallet Necessary?

Most cryptocurrency exchanges enable users to purchase crypto upon sign up, and the holdings are stored in the exchange's built-in wallet. However, for increased security, moving the assets to a hot or cold storage wallet is recommended.

If you're using a popular exchange like Coinbase, or UnitEx and have a small amount of crypto in your portfolio, it is generally considered safe to keep your crypto on the exchange. If you are concerned about the security of your holdings and want peace of mind, consider using a hot or cold wallet. The decision to move assets to a separate wallet is a personal one.