Cold wallets are those crypto wallets that rely on separate hardware to run and can be switched off when not in use.
They are also referred to as hardware wallets because they have their own independent hardware that helps them maintain air-gap with the internet. However, there are other types of cold wallets too like Paper Wallet and Deep Storage Crypto Vaults.
An air-gap is a state where a hardware is disconnected physically from all sources connected to the internet. This is done to isolate a device from the internet to prevent hacks or intentional damage.
Types of Cold Wallets
There are several types of cold wallets depending on who uses them. Most cold wallets are common hardware wallets like Trezor or Ledger. However, there are also specialized wallets like Deep Cold Storage Vaults and simpler ones like Paper Wallets.
Hardware Wallets
Hardware wallets are commonly used for individual investors who want to save some crypto over time and build wealth in the long run.
These wallets come as pocket-sized hardware and are suitable for individuals who want to build a crypto portfolio.
Crypto Vaults
Crypto vaults are deep cold storage wallets that are used for storing larger crypto reserves like exchanges. These wallets are built with military-grade hardware and are secured by experts who can act fast and decisively in any situation.
Crypto vaults are controlled by multi-signature entitled and often have multiple layers of authentication before any withdrawal can be made.
Often crypto exchanges use these wallets and they store around 90%-95% of their exchange reserves.
Paper Wallets
Paper wallets are just ordinary pieces of paper that contain wallet seed phrases or private keys. A user who uses a paper wallet can log into their wallet with those private keys and use it when required. Rest of the times, the wallet remains in an idle state.
However, paper wallets are a lot more risky to use because anyone who can manage to click a photograph of the wallet can easily access your crypto.
Benefits
Isolated From Internet
Cold wallets remain isolated from the internet most of the time and this protects them from random hacks and attacks. This is a major reason why people prefer cold wallets more.
Self Custody
Like all custodial wallets, cold wallets give you full control and ownership over your crypto.
Sense of Ownership
As modern humans, our sense of ownership is deeply connected with materialistic things and this is why we feel a greater sense of ownership when we hold a hardware wallet. For me, this feels similar to holding a locker or a safe.
Helps Maintain Discipline in Long Term Investments
Since cold wallets take more effort to operate, it prevents frequent access and as a result, you feel less tempted to speculate on your crypto. You are also more protected from the possible tensions arising from market volatility.
Disadvantages
Cold wallets do have some disadvantages too but most of the major ones like crypto loss due to hardware failure are a thing of the past.
Prone to Hardware Failure
Cold wallets being hardware are prone to failures suffered by common electronic gadgets. However, these days they can be easily replaced or restored in case of hardware damage.
Warranty Issues
LIke all electronics, Ledger also has a limited warranty. But the issue is, even after the warranty period is over, our private keys still lie inside that wallet and if we lose access to the wallet, we need to purchase another one to restore it.
Currently, there seems no solution to this.
Issues With Firmware Update
Firmware inside the cold wallets need to be updated after some time (after a major security update). Though this protects the wallet from being hacked, it sometimes causes trouble.
Below is a real life problem faced by a Ledger user that poses a large risk to their crypto. The users discusses how they were asked by Ledger to restore their apps after a firmware update.
Expensive
Most hot wallets like MetaMask come for free but you need to purchase a cold wallet. Even though they cost less than $100 for a decent and reliable one, they still cost some money.
Best Practices
Keep Your Hardware Safe
It goes without saying that hardware must be protected from water, liquids, dust, direct sunlight exposure, children, animals and other physical damage among many other things.
Keep Your Private Keys Private
Private keys are named so for a reason. Anyone who even sees your private keys once can access them from anywhere. Therefore, it is of utmost important that they must remain private at all times.
The best way to do so is to write your seed phrases and keep them somewhere only you can access.
Regularly Check Your Wallet
It is critical to check on your wallet and crypto balances say once in a month. This is because there have been enough cases where hardware wallets were drained despite nothing wrong with them.
Ensure Firmware is Updated
An updated firmware is needed to ensure your wallet enjoys the highest grade of security and you have the best peace of mind. Though there are some issue, but most of them aren’t frequent or occur as widely as you might think.
