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What are Cold Wallets? And How Do They Function?

20 Oct 2022 By : Rohit Khandelwal
Southeast Asia’s Lar

Cryptocurrencies have become a new mode of value transfer on the internet and making the same disruptions in offline retail with their fast-paced expansion. With an increase in the use cases of blockchain tech and crypto tokens, the need to secure your fund has also increased significantly. Cryptocurrencies exist in a digital form, and all your funds could be inaccessible if you lose your seed. 

Multiple methods are used for the safety of your funds and crypto wallets are the top products that ensure high-level security for your funds. Crypto wallets are also the most common method used for storing cryptocurrencies, however, not all crypto wallets are the same. Some crypto wallets are more secure than the rest and some have a clear USP for the user experience.

In this CoinGabbar blog, we will explore cold wallets, their mechanism, and usability, and share a brief guide on how to use your first cold wallet. We will also share some of the things that you should keep in mind before you choose your crypto wallet. 

What are Cold Wallets?

Crypto blockchains are always connected to the internet to ensure that transactions are made possible by validators worldwide. However, your crypto keys do not need to be stored in online storage for you to transact your cryptocurrencies. Cryptocurrency private keys are the sole access to your entire crypto funds and keeping them online makes them susceptible to all kinds of digital intrusion. 

In online or hot wallets, crypto private keys are stored in cloud storage. Hot wallets are not 100% secure and require a bond of trust between the user and the vendor for the safety of funds. This not only compromises the security of your funds but also defeats the cause of the decentralization of money.

This is where the cold wallets come into the picture. Cold wallets are those digital storage solutions that allow users to store their cryptocurrencies offline. Storing the cryptocurrencies offline will safeguard them against online data breaches and give you complete custody of your assets. This enables extra layers of security against any system loopholes that can be exploited to gain unauthorized access to your funds.

While using cold wallets, your private keys never leave your device and all crypto transactions are processed within a secured offline ecosystem. This guarantees high-level security for retail crypto investors, however, this also enables large-scale companies to safeguard their important information without relying on any third-party cloud storage.

How Does a Cold Wallet Function?

Cold wallets can be categorized roughly into two categories. 

  1. Paper Wallets 

  2. Hardware Wallets

Paper wallets are those cold wallets in which the private keys of your cryptocurrencies are either written or printed down on a piece of paper to ensure that the user does not have to store them on the cloud. Paper wallets were very popular during the initial phase of crypto adoption but as the use of cryptocurrencies became more prevalent many fallacies in their design got highlighted. 

Paper wallets are fragile and hard to maintain, making them a bad choice for storing values that can be worth thousands of dollars. However, paper wallets are economical and cost significantly less than hardware wallets.

On the other hand, hardware wallets are those cold wallets that store private keys in secure and offline digital storage. Hardware wallets put multiple layers of security to ensure that they cannot be hacked using external brute force. Hardware wallets come with different features such as biometric logins, key management, secure wireless connectivity, encrypted backups, and recovery methods. 

Things to Keep in Mind Before Choosing a Cold Wallet

Here are some of the things that you must know before choosing a cold wallet for yourself. Knowing these things will help you in taking the right decision before you invest in a sturdy hardware wallet.

  1. If you are someone who follows the rule of diversification in your crypto investments then you must have invested in more than one crypto token. However, hardware wallets have their limitations and you must check whether your preferred choice of the token is supported by your hardware wallet.

  2. Backups are extremely important when you are dealing with a sizeable portfolio but different hardware wallets come with different backup options. You must ensure that your wallet is provided with sufficient backup options as per your needs.

  3. Nobody wants transactions that are complicated to excuse and that is why the usability of your hardware wallet is another important thing that you should keep in mind. A hardware wallet with touchscreen navigation is far easier to use than a device with only buttons.

  4. The speed of your wallet while conducting the transaction is also important for a better user experience. Make sure that you are getting a hardware wallet that is easier to connect with your devices and can execute the transaction within seconds.

  5. Last but not the least, the security mechanism of your hardware wallet must be robust enough to guard your funds. If your hardware wallet is using outdated encryption methods and does not provide regular security updates then you must think twice before investing in that hardware wallet.

Conclusion

Cryptocurrencies are here to stay and with rising investments, the demand for crypto wallets is also going to increase. Securing your crypto investments with the right methods and efficient tools has become the need of the day. With the surging rate of blockchain adoption, we are also going to witness an increase in the number of attacks on comparatively less secure blockchain ecosystems.

Hardware wallets not only secure your funds from any external security threat but also create adequate backup options for your private keys. They are the safest bid you can take when it comes to safeguarding your crypto assets and if you are up for a HODL strategy, you must score a hardware wallet as soon as possible.

We hope that this blog had helped you with your questions regarding cold wallets and how can you pick the right one for you. What according to you is the best hardware wallet in the market for cryptocurrencies? Share your views in the comment section down below.

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