Cold Wallet

November 21, 2023 - Around 2 mins mins to read

Understanding Cold Wallets

A cold wallet refers to a type of cryptocurrency wallet that remains disconnected from the internet and other unsecure networks when not in use. Its purpose is to provide an extra layer of security compared to hot wallets, which are software wallets stored on a user’s local computer or accessed through a website interface provided by a service provider.

Individual cryptocurrency users often opt for cold wallets as an affordable and straightforward method to safeguard their crypto funds against potential hacking, phishing, and other forms of attacks that could lead to permanent loss of coins.

Moreover, businesses that hold custody over their customers’ funds, such as cryptocurrency exchanges, also rely on cold wallets to enhance security. These businesses become attractive targets for hackers due to the centralized storage of coins belonging to tens or even hundreds of thousands of users. By physically separating the majority of reserves from the internet, they can effectively protect against such attacks.

Cold wallets are available in various forms, with paper and hardware wallets being the most commonly chosen options.

A paper wallet is a physical piece of paper that contains both the public address and private key of the wallet. The public address is used for receiving cryptocurrency, while the private key is necessary to access and send funds. Many paper wallets also include QR codes for convenient scanning using a smartphone.

On the other hand, a hardware wallet is an electronic device that must be physically connected to a computer to be accessed. These devices can range from homemade inventions to commercially available consumer devices, often taking the form of a USB stick or drive. Additionally, professional engineers have also developed proprietary solutions.

Although less popular, there are other types of cold wallets, including smart cards and sound wallets. Smart cards store private keys, while sound wallets store them in the form of audio on CDs or vinyl records.