What Are Cold Wallets? The Most Secure Crypto Custody

In the world of cryptocurrency, security is paramount. The rise of hacks and security breaches has made cold wallets an increasingly popular choice for those looking to protect their assets offline.

Definition: A cold wallet, also known as a cold storage solution, is a device that protects users’ crypto by generating and storing their private keys offline.

Key takeaways:

• Major security incidents in 2022 targeted hot wallet applications exposed to the internet, particularly mobile wallets.
• Cold storage is the best way to protect your cryptoassets from theft.
• Cold storage comes with trade-offs, such as limited access to the world of Web3 and the inability to easily plug into your favorite DEX or NFT marketplace.
• New hardware integrations with MetaMask offer some relief, but they do not provide the same level of security as ultra-cold storage solutions.

A cold wallet might be the right choice if you’re willing to sacrifice some convenience for added security. In this article, we’ll explore the pros and cons of cold storage and show you how to choose the best solution for your needs.

What is a cold wallet?

With wallets, security is all about how the device stores private keys. A cold wallet, also known as a cold storage solution, is a device that protects users’ crypto by generating and storing their private keys offline. These keys are not the same as the seed phrase you generate every time you create a wallet. Check out our explainer on seed phrases for a refresher on the difference.

These keys are what’s needed to sign a transaction. Whoever holds them has the authority to move that crypto to another address. By keeping these keys entirely offline, cold wallets eliminate the risk of losing funds to any online hack.

How cold storage works

When it comes to completing the transaction signing process, broadcasting those signed transactions to the network poses a challenge. There are two approaches to this: regular cold storage and ultra-cold storage.

In regular cold storage, the user connects the offline cold storage wallet to another device with an internet connection using a USB cable. This enables the user to plug the hardware wallet into MetaMask to sign transactions, allowing access to smart contracts. Users can provide liquidity, vote on governance proposals, and even take out loans. Every transaction requires the user to enter a pin on the device manually. While this setup is more secure than using MetaMask directly, it is essential to note that these wallets have some security vulnerabilities. This is because any USB connection can expose a device to malware.

Each initiated transaction is temporarily transferred to the secure offline space on the wallet, which stores the private key. The transaction is signed and returned to the online environment before being broadcast on the blockchain network. This process takes place in a matter of seconds, obscuring the complexities from the user.

How ultra-cold storage works

Alternatively, ultra-cold wallets have zero connection to any device that can connect to the internet, making them the most secure solution. However, this also means the user must manually broadcast a signed transaction to the network. Some wallets, such as Ellipal, use digital screens to make this process more user-friendly. When the user wants to send a transaction, they enter the receiver’s address on the device and sign the transaction like they would on any other wallet. The device then transforms that signed transaction into a QR code that can be scanned with an internet-connected device. Once you have the signed transaction, you can broadcast it to the network.

It is important to note that the security of cold wallets often comes at the cost of convenience. Compared to hot wallets, cold storage solutions require several stages to complete transactions. Nevertheless, modern cold storage solutions are increasingly addressing the complex user experience to make them easier to use.

The term “cold” also implies that the stored assets remain untouched for a relatively long period. Hence, cold wallets are rarely used as a simple solution. Think of them as a safety vault full of gold. You wouldn’t carry it to the convenience store to pick up a Mountain Dew. Many people use a combination of cold and hot storage in their self-custody journey. For more on the pros and cons, check out the guide on hot vs cold wallets.

Reports confirm that over 80% of bitcoin’s supply is held in cold storage, making it a popular choice among bitcoin investors. Additionally, cryptocurrency-related businesses such as exchanges and custodians also adopt various forms of institutional-grade cold storage solutions.

Why do you need a cold wallet?

A cold wallet is essential because it reduces the risk of hackers stealing your funds. These solutions provide iron-clad security against online attack vectors such as software viruses, clipboard malware, and smart contract bugs.

For instance, the largest cryptocurrency wallet hack of 2022 resulted from an exploit that took advantage of a vulnerability in how Slope, a mobile wallet app, stored users’ seed phrases. The company had centralized server storage for every seed phrase, allowing the hacker to access every phrase generated by the wallet. Over four hours, approximately $4.1 million worth of assets were drained from the wallet addresses of 9,231 users. This type of exploit is impossible with cold storage solutions that keep the entire wallet generation process offline. Cold wallet seed phrases are only visible to the owner.

Additionally, cryptocurrency transactions are irreversible and often not covered by insurance policies as traditional finance. Users must take proactive measures to safeguard their assets, and a cold wallet is one of the most widely available options. A cold wallet can provide even greater security by integrating multi-signature support and additional passphrases.

How do cold wallets prevent theft?

A cold wallet prevents theft by ensuring that your cryptocurrency private key is never broadcast online. To understand why this is essential, consider what happens when you create a hot wallet.

The wallet application generates your private key on an internet-connected device which may already contain unknown vulnerabilities. Further, each transaction with the wallet is digitally signed online using the associated private keys before being broadcast onto the blockchain network. This process makes the private key vulnerable, as attackers can exploit any security issues to gain unauthorized access.

A cold wallet eliminates this risk by generating your private key offline using secure chips built into the wallet device. Transactions also take place in this protected environment, ensuring that your keys are never exposed online.

Types of cold storage wallets

Cold storage wallets come in different shapes and sizes. There are also slight differences in the user experience, as a closer look at each option reveals. Yet, they fulfill the fundamental role of eliminating most risks associated with storing cryptocurrencies online.

Paper wallets

A paper wallet is the most basic form of a cold wallet. It is a document that includes a pair of private and public keys (and sometimes a QR Code address) designed to store cryptocurrency. The user generates the keys offline and prints a copy for secure storage. Afterward, they can transfer cryptocurrency to the paper wallet address.

A user of a paper wallet securely stores the paper document in a safe place and takes proactive measures to protect them from damage. Thus, the idea of a paper wallet is often considered archaic, given the numerous options currently available to investors. Yet, the solution comes in handy as a cost-effective way to store cryptocurrency or move it across borders.

Sound wallets

A sound wallet is another creative way to provide secure cold storage for cryptocurrencies. The user encrypts and records high-quality audio of their private key or seed phrase using sound file products like CDs, vinyl discs or USB flash drives. Users would generally set up a spectroscope application or device to decode the keys in the future. Meanwhile, they can always transfer cryptocurrency to the associated addresses for cold storage.

Sound wallets are often considered an expensive way to store cryptocurrency. However, its primary appeal is that it encourages long-term storage as users go through a lengthy process to recover their private keys.

Hardware wallets

Hardware wallets use a secure smart card to generate and store cryptographic keys offline. The most popular hardware wallet companies – Ledger and Trezor – build devices with screens and buttons that perform basic operations. They may require a physical connection with an external internet-connected device to initiate transactions or simply enable a secure connection via Bluetooth technology.

Hardware wallets are the most widely adopted cold storage wallets. The reason is not far-fetched. As long as users safeguard their hardware wallet and seed phrase, there is minimal risk of losing funds to a security breach.

Granted, there may be human-led issues, such as compromised production or shipping processes involving hardware wallets. Users can avoid these risks by purchasing wallets from official sources. They can also achieve even greater security by practicing deep cold storage.

Deep cold storage

Deep cold storage involves storing your private key using a method that makes it relatively difficult to access. For instance, you may split seed phrases and keep them in several vault locations far from your home.

High-profile individual or institutional investors may opt for third-party vault services that provide secure cold storage with multi-signature access to prevent unauthorized access. Others choose to use an immutable timelock contract preventing access to the coins for a defined period. The ease of access is essential when setting up deep cold storage. Sometimes, it could take a few days or even weeks to access your private keys depending on the storage location.

Best cold storage wallet

The best cold storage solutions provide unparalleled security and a degree of convenience that suits an investor’s objective. Therefore, the list below is not definitive of the best cold storage wallets. Instead, we hope it sets you on the path to identifying the ideal cold storage solution.

• Ledger Wallet

Launched in 2014, Ledger offers a range of hardware wallets for different categories of crypto investors seeking secure cold storage. The company has sold over four million copies. The Ledger Stax is the company’s most recent and expensive device, featuring a more intuitive user experience. The Ledger Nano X and Nano S Plus devices also provide a similar level of security and support popular cryptocurrencies.

• Trezor Wallet

Trezor also launched in 2014 and has sold over one million devices. The company provides two cold wallet devices – Trezor One and Model T. The Trezor Model T is the most advanced of the two devices, supporting more coins and featuring functionalities such as serving as a hardware token device. The Trezor One is a more affordable option and suits the needs of the average crypto investor.

• Ellipal Titan Wallet

Ellipal Titan Wallet is a cold storage wallet that utilizes air-gap technology. This air gap technology ensures a higher level of security as it prevents the wallet from being hacked through internet connections. Unlike traditional cold storage wallets, the Ellipal Titan does not connect to the internet, Bluetooth or USB. Instead, transactions are conducted using QR codes, generated on the Ellipal app and scanned using the Titan’s camera. The Ellipal app allows users to receive coins but not to send coins, as the private keys are stored inside the Titan wallet and transactions must be signed and approved using the QR code on the wallet.

• KeepKey

Developed by crypto platform ShapeShift in 2015, KeepKey is one of the most affordable cold storage wallets. KeepKey supports all basic crypto operations and features a large screen for users to verify transactions before signing them. The wallet offers native integration to the ShapeShift platform and is ideal for crypto investors looking for a cold storage solution for interacting with decentralized finance (DeFi) applications.

• SafePal S1

Backed by Binance Labs, the SafePal S1 hardware wallet launched in 2019, making it one of the newest additions to the industry. The device offers a generally intuitive experience and is paired with the SafePal app for the best experience. Like most wallets, the user’s private keys are stored in the Secure Element Chip. The SafePal S1 wallet is also relatively affordable and ideal for investors looking for a cold storage wallet with access to a wide range of blockchain networks.

• Third-Party Vault Services

Crypto-native companies like Unchained Capital and Casa offer secure cold storage services dedicated to high-profile and institutional cryptocurrency investors. These solutions include advanced functionalities such as multi-signature verification, timelock, and decentralized physical storage of private keys. Investors who use this option still retain control of their private keys but in a manner that provides greater security against theft.

Final thoughts

A basic cold storage solution such as a hardware wallet is highly recommended for cryptocurrency users, especially those with substantial amounts invested. Additionally, the best known Operations Security (OpSec) is to combine a hardware wallet, multi-signature feature, and deep cold storage.

The current complexities associated with setting up a cold storage solution is a reasonable price to pay for securing your crypto wealth. As demand for these solutions increases, available options are bound to become more user-friendly and meet the needs of mainstream audiences.

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