You’re a savvy cryptocurrency enthusiast. You’ve worked hard in life and saved your money. You did your research and you bought into cryptocurrency, whether it was Bitcoin (BTC), Ethereum (ETH), XRP, Litecoin (LTC), EOS, Cardano (ADA) Tron (TRX), Stellar (XLM), NEO, Monero, ZCash, etc. But you’re worried as heck because you keep reading about all of these exchange hacks or people phishing innocent crypto-enthusiasts like yourself.
An excellent solution to this problem is a cold wallet for storing your crypto. What is a cold wallet? I’ve got it all explained right here within the next five minutes! So keep reading.
- Cryptocurrency is a Bearer Asset
- What is a cold wallet?
- What does a cold wallet do?
- Different Types of Cold Wallets
- Markshire Crypto Conclusion
Cryptocurrency is a Bearer Asset
A bearer asset means that the person/entity who physically is in possession of an asset is the owner. This is opposed to ownership by assignment, where someone is assigned to be the owner of something (i.e. a property or vehicle).
Someone who is holding physical gold bars is the owner of that gold. Similarly, someone who is holding $10,000 in cash is the owner of that cash. Someone can live in a house, but not be the owner (i.e. a rental property) and you can legally evict someone who tries to “take” the house from you via squatting etc.
One of cryptocurrency’s features is that they are bearer assets. This makes them valuable. This is achieved through public-private key pairs. The person(s) who have possession/knowledge of the private key(s) are considered the owners.
Not your keys, not your crypto.
The person who owns the private keys, owns the cryptocurrency/digital asset.
That is why it is so important to keep your private key private and protect it appropriately. Some people will store their cryptocurrency on an exchange, in which case you really do not have true possession of the private keys as it is stored on the exchanges cold wallet or hot wallet (or both), not your own cold wallet.
What is a cold wallet?
A cold wallet is an offline device/mechanism that stores your cryptocurrency private keys (or Recovery Seed) offline.
A cold wallet is the gold standard for protecting your cryptocurrency assets. However, there are different types of cold wallets. You must choose the one that suits your security needs most appropriately.
Some people prefer to keep their cryptocurrency on their personal hot wallet. Others prefer to keep their cryptocurrency on a cold wallet. I would recommend keeping your cryptocurrency on a cold wallet.
As you can see from the image above, online hot wallets allow for greater ease of use, whereas offline cold wallets allow for greater security, but are more difficult to access. Ideal for a HODLer. However, the ease of use for cold wallets is truly improving.
What does a cold wallet do?
A cold wallet is how you keep your Bitcoin or cryptocurrency private keys offline, protected from hackers that might try to gain entry on a hot wallet (online wallet or on a device connected to the internet).
Cold wallets typically store your private keys in an encrypted microchip on a physically separate part of a hardware wallet. Access to the private key is encrypted in a recovery seed word list of 12 to 24 randomly generated words. These words are your access to your encrypted private keys.
You must keep your recovery seed word list safe. If someone steals them then they can steal your cryptocurrency.
Your wallet protects your private keys by storing them on a physically separate part of the wallet, on a physically separate microchip. There are several ways to access your wallet to send cryptocurrency.
Cold hardware wallets typically have a PIN and/or passphrase to access your wallet and give you the ability to send cryptocurrency.
You do not need to have access to your wallet in order to receive cryptocurrency. The sender only needs to have your address (much like an email address, just alphanumeric) and they can send cryptocurrency to your wallet all year long without you even accessing it.
However, in order for you to send cryptocurrency, you need to have access to your private keys, because the private keys are what sign the transaction which verifies that you own the keys and can send the cryptocurrency.
If you have a hot wallet then your private keys are stored on a device that is connected to the Internet and its easy to send cryptocurrency. However, you are at higher risk of being hacked and having the private keys stolen due to the fact that the hot wallet constantly sits on a device connected to the Internet, so 24/7 any software virus/malware can potentially steal your private keys.
Because the cold wallet signs the transaction with the private keys in an “offline environment”, using a cold wallet to send cryptocurrency is a little more work than with a hot wallet. The cold wallet device typically must be temporarily connected to an online device (i.e. a laptop or mobile phone) and the transaction information is sent to the cold wallet, which then signs it with the private keys offline, the transaction is verified and the network is updated, all without exposing your highly valuable private keys to the Internet.
Different Types of Cold Wallets
Crypto cold wallets are generally understood as “hardware wallets” – a USB key specially designed to keep the private keys safe on a separate chip; however, there are other various forms of cold wallets, all having one thing in common: they are offline.
there are sites where you can generate Bitcoin private keys for your Bitcoin and print it out as an alphanumeric code and QR code, instead of as a seed word list.
- Handwritten Paper Wallet (plain or laminated)
- Pros: it is offline and not on an electronic device, so it is not subject to digital vulnerabilities such as viral software or tampering.
- Cons: anyone who can see it can read it and thus compromise its security. Paper degrades, can’t get wet and is susceptible to being eaten by insects or rodents. Introduces human error in writing down the words, or illegible penmanship.
- Printed on Paper
- Pros: legible, offline, not on any digital device (except the printer).
- Cons: must trust the printer (some printers are connected to the internet and/or have a memory of what was printed and could be hacked). Some types of ink bleed/smudge. Anyone who physically views the paper may steal your private keys.
- Engraved/etched on metal (CryptoSteel)
- Pros: legible, offline, durable, not on any digital device. Fireproof, waterproof, and significantly more durable and resistant to degradation than paper.
- Cons: Takes time to engrave, costs a small amount of money to purchase. Anyone who can see it can read it.
- Digitally stored on CDs
- Pros: unreadable to a person looking at the physical CD.
- Cons: susceptible to damage (scratches, breakage, heat exposure/melting, smoke exposure, moisture), disabled by magnetic waves. Old technology. Difficult to then use to send cryptocurrency.
Physically Engraved Coins
- Physical Bitcoin (or cryptocurrency) model coin
- Pros: physically hides the private key in a tamper-proof seal. Can be made of plastic or metal, with the actual private key seed word on paper, plastic or metal inside the physical coin model.
- Cons: must trust the manufacturer that they have legitimate key generation procedure. Must trust the manufactures operational security (i.e. is the computer used to generate the keys online? Did they keep a copy of private key? Is their printer connected to the internet or storing the private keys in a memory cache?). You must trust that the tamper-proof seal is truly tamper-proof (some “tamper-proof” seals have been shown to not be truly tamper-proof).
Brain Cold Wallet
- Brain Cold Wallet
- Pros: No one can see it, no viral software can hack it. Environmental damage is not a concern.
- Cons: it is dependent on your memory, which may incorrectly remember the seed word list or forget a word or forget the word order. You may die or become incapacitated.
- USB/Flash drive
- Pros: hides the private key from visual view. Small, easy to transport. More durable than CDs and paper.
- Cons: must stay dry. Can break or be damaged by smoke or heat or water.
- Specially designed Hardware Wallets (recommended)
- Similar to a USB, but the technology is specifically designed to store cryptocurrency private keys, which offer a few advantages.
- A physically separate area of the USB that holds the private keys, making it immune to software viruses.
- Protected by PIN access.
- Can enable Passphrase access in addition to the PIN
- Seed word list back-up for recovery.
- Many have plausible deniability with hidden wallets to protect against theft.
- Cons: can be damaged (water, heat, physical breakage) – this is mitigated by the fact that you have a recovery seed word list.
Markshire Crypto Conclusion
As I said earlier, the most commonly referred to cryptocurrency cold wallet is the specially designed hardware wallet. You’ve heard of these as Ledger Nano S, Ledger Nano X, Trezor One, Trezor Model T, BitBox, KeepKey, and CoolWallet.
I will have a specially dedicated post for Hardware Wallets. Basically, all hardware wallets are cold wallets. But not all cold wallets are hardware wallets.
Hardware wallets are the most recommended and the most secure cold wallets. They protect your private keys offline and allow you to back them up with a seed word list, as well as potentially a passphrase. In order to access the hardware wallet, you need a private PIN.
In order to steal from the hardware wallet someone would need both the seed word list and passphrase to retrieve/access the private keys before sending them anywhere or to back them up should the actual device be compromised or damaged.
The gold standard for cryptocurrency protection, for the average user, is the use of a cold wallet. Also, the bare minimum security for a cryptocurrency exchange is to keep >90% of the cryptocurrency assets offline in cold storage. If you or an organization has very large sums of cryptocurrency, there is another level of protection called deep cold storage, but we can talk about that in another post.
I hope that this post on what is a cold wallet was helpful/insightful. Please comment on anything you want to add or to ask questions!