Storing digital assets online increases the risk of scams and theft, even when using third-party custodial services. Fraudsters and abusers defraud owners of hard-earned cryptocurrencies by using phishing attacks, fake wallets, and illegal cryptocurrency schemes. How do you prevent unauthorized access to your funds?
Hi everyone, this is Alex. Having been studying blockchain and Bitcoin for more than five years, I have been asked more than once how best to protect cryptocurrency funds. In this article, we will analyze the most reliable way – a cold wallet.
- Cryptocurrency Cold Storage Wallet Definition
- Popular Cold Storage Wallets
- Comparison of Hot and Cold Storage Wallets
- Bitcoin Cold Storage Wallets
- Encrypting Your Bitcoin Cold Storage Wallet
- How to Use Bitcoin Cold Storage Wallet?
- How to Protect a Cold Storage Wallet?
- Disadvantages of Cold Storage Wallets
- Final Notes
Cryptocurrency Cold Storage Wallet Definition
A cold storage wallet for cryptocurrency is primarily a package of tools in a USB drive that can store the information you need to access cryptocurrency without requiring a constant Internet connection. Today, cold wallets are the most secure way to keep funds. Protection is provided by biometric data of the owner or by entering a unique combination.
Whether it’s for Bitcoins or other cryptocurrencies, every cryptocurrency wallet has a public and a private key. The public key is the address to which others can send you cryptocurrency. The private key gives you access to the coins: it allows you to withdraw and spend them.
That’s why it’s essential to keep it in cold storage – in other words, without access to the Internet: if something is not accessible through the Internet, it will be invulnerable to hackers and malware.
Popular Cold Storage Wallets
Provides a high level of security thanks to the PIN code. During installation, a 12-word phrase is generated to restore the wallet. Trezor Model T supports the following cryptocurrencies: Bitcoin, Litecoin, Etherium, and ERC 20 tokens, Bitcoin Cash, Bitcoin Gold, Namecoin, and Dogecoin.
Like Trezor, Ledger Nano S requires a PIN code. It also generates a recovery phrase during installation. The private keys are stored in the hardware, and to access them; you need to connect the device to a computer and enter the PIN. Ledger Nano S creates full backups of the wallet in case the device is lost. It supports multiple cryptocurrencies. Users must physically press a button to confirm and execute transactions, further increasing the security of the wallet.
An easy-to-use cold wallet that requires a connection to a computer. It uses a random number sequence system and a PIN code that protects against malware. The recovery phrase for creating a backup wallet consists of 18-24 characters. KeepKey wallet supports several cryptocurrencies, including Bitcoin, Bitcoin Cash, Ethereum, Litecoin, Namecoin, and Dogecoin.
Comparison of Hot and Cold Storage Wallets
A hot storage wallet is a cryptocurrency vault connected to the Internet. We’ve already found out that cold wallets are safer, so why use hot storage for Bitcoins? The following table will help to understand the differences between these storage methods:
|Hot Storage Wallet||Cold Storage Wallet|
|Connecting to the Internet||Connected to the Internet||Not connected to the Internet|
|Comparison||Current account||Savings account|
A hot wallet is more vulnerable, but this risk allows for a certain level of convenience. A hot wallet allows you to use all the services we are used to in an online bank: transfers, deposits, exchanges, and everything related to financial management.
Like other online services, hot wallets can be protected: methods such as passwords, PINs, two-factor authentication, etc., are used for this purpose. Of course, persistent and experienced hackers can overcome these security measures, so the best cryptocurrency exchange platforms use cold wallets in addition to the hot storage required to provide financial services.
Bitcoin Cold Storage Wallets
A cold bitcoin wallet involves storing a key without having access to the Internet. It is more reliable and secure in case of tampering. It is recommended to use large amounts of cryptocurrency if you need to provide storage for a long time. The peculiarity of this bitcoin storage is getting the funds; you need to enter a public key and withdraw them – a private key. Cold Bitcoin wallets are divided into the following types:
- A software wallet is a program that is installed directly on a computer. They can be light and heavy. Light ones are distinguished because there is no need to download the entire blockchain to use it.
- A mobile wallet allows you to conduct transactions using your phone. The Coinomi app, which supports cold storage of funds, stands out.
- A hardware wallet has a small size and a built-in display. The best representatives of such wallets are Ledger Nano S, Trezor, and KeepKey.
- A paper wallet involves storing cryptocurrency by printing out the key and address on paper. The funds are outside the Internet, which protects them from tampering.
Encrypting Your Bitcoin Cold Storage Wallet
After the cold storage program (Bitcoin Core) is installed, you should encrypt your wallet before using it. Without proper encryption, bitcoin addresses can be compromised and stolen. Encryption is done using this method:
- In the application menu in the upper left corner, choose “Settings”.
- Then click on “Encrypt wallet”.
- In the window that appears, enter a phrase of 10 or more characters (or eight or more words).
Important: you will need to memorize your passphrase. Otherwise, you will not spend money you keep in your bitcoin cold wallet.
How to Use Bitcoin Cold Storage Wallet?
Now, the wallet owner has the following options for storing bitcoin without an Internet connection: using a .dat file or by exporting personal keys. Setting up the wallet is only half the task. You need to learn how to use cryptocurrency correctly. The possible ways here are as follows.
- Install an app on the device that is used to import cryptocurrency from the wallet.
- Disconnect from the network and re-enter the application.
- Replace the .dat file with the document used to store bitcoin.
- Connect to the Internet, wait for blockchain synchronization.
- List the desired amount of cryptocurrency.
Using private keys
- Install Bitcoin Core and log out of it.
- Disconnect the Internet connection and re-enter the program.
- Open the help section and the debugging window.
- Specify a passphrase to decrypt the wallet by entering “passphrase” 60 into the wallet passphrase console.
- Transfer the key by entering the import private key command.
How to Protect a Cold Storage Wallet?
To provide a greater level of protection for your wallet, you should follow these tips:
- Use strong passwords. The first step to bitcoin wallet security is strong passwords on your devices. Password complexity is the foundation of digital asset security. Simple passwords open the way for hackers to break in.
- Encrypt the wallet. It is challenging to store cryptocurrency offline without sufficient protection. That’s why you need to use encryption to protect your wallet’s PINs and passwords. It will protect your wallet from intruders trying to steal the cryptocurrency.
- Back up your wallet regularly. Making regular backups is a great way to protect your cryptocurrency if your device gets lost or broken. You can use a backup to restore your wallet data.
- Use multi-signatures. If a cold bitcoin wallet is compromised, multi-signatures will prevent hackers from accessing it.
- Keep the recovery phrase in a safe place. A recovery phrase, or mnemonic phrase, allows you to recover the information needed to access a cold wallet in the event of a device failure. The recovery phrase should be written down on paper and kept in a safe place.
It’s important to remember that no amount of caution can hurt. That’s why you shouldn’t follow any suspicious links sent by unknown people from the computer where your money is stored.
Disadvantages of Cold Storage Wallets
Devices for this type of cryptocurrency storage are very reliable. However, they also have disadvantages. For example, there is a chance to forget the pin code or seed or lose the paper carrier. To avoid such things, it is recommended to be more responsible in choosing code phrases. Also, not everyone will want to give up to $100 for such a cold wallet for storing ether and other cryptocurrencies.
We hope that the information provided in this article will help you choose a cold wallet and use it safely. The Artex Global team publishes articles every week to help its readers understand all the nuances that accompany the world of cryptocurrency. Perhaps you will be interested in the topic of hidden mining, or maybe you have been looking for a long time for a comparison of crypto exchanges in USA? Artex Global is at your service.
I have been studying cryptocurrency for over 5 years. I have accounts in every exchange and I test everything on myself.
I want this market to be more understandable for everyone.