Hardware Cryptocurrency Wallet and Cold Storage Wallet

What is the difference between a Hardware cryptocurrency wallet and cold storage and how to store crypto in cold storage? Many people are confused over a hardware wallet and cold storage as a way to store your bitcoins and other cryptocurrencies. The difference between Hardware Cryptocurrency wallets and Cold Storage is mostly in wording though. Let’s discuss the main differences between hardware wallet and cold storage in the crypto industry and explain in more detail what they mean.

Crypto Cold Storage Wallets Key Takeaway

  • A crypto storage device helps you store your cryptocurrency in a safe and secure place. The most secure method is a cold crypto wallet that comes with software that allows the user to view their portfolio.
  • Crypto cold storage wallets help you store your cryptos offline where they cannot be hacked. Some of the cold wallet storage methods include paper wallets, sound wallets and hardware wallets.
  • Some of the cold wallets you can use to store cryptos offline include Trezor, Coldcard, BitBox02, Keystone and Ledger. You can use them without having to connect to the computer or internet.

Cold Storage Hardware: What is a Hardware Wallet or Cold storage wallet

A hardware wallet or cold storage wallet is a small computer device that is used to store cryptocurrency. It is a form of cold storage because the wallet is not connected with the internet and the private key is not stored on a server, phone or any other computer. You can use it to generate receiving Bitcoin addresses as well as sending addresses.

Cold storage is just the name for any method where your private key is not stored on a networked computer where it could be stolen from: it can be as simple as a piece of paper with your private key written on it.

Cold storage basically means that Bitcoins and other cryptocurrencies are stored offline, i.e. that your private key is not stored on a computer that itself is connected to a network such as the internet. There are multiple Bitcoin cold storage devices as well as other cryptocurrency cold storage wallets.

List of Hardware Wallets / Cold Storage Wallet

More and more hardware wallets are coming available. These cold storage wallets have different degrees of security. The best security is offered by those devices that cannot be tampered with, and those that can be used without having to connect to a computer with internet connection. These are called air-gapped devices. Some of these devices can be used as a wallet for also different cryptocurrencies, while other wallets are (optionally) Bitcoin only (recommended).

WalletSource codeBitcoin only?Communication with laptop or phoneNotes
TrezorOpen SourceOptional firmwareUSBAn extra passphrase is recommended for fully secured wallets
ColdcardVisible SourceYesAir-gap mode with SD cards (preferred), USBSecure Multisig
BitBox02Open SourceOptional by hardwareUSBSecure Multisig
KeystoneOpen sourceOptional Bitcoin-only FirmwareAir-gapped with QR codesNot a lot of reviews
Blockstream JadeOpen SourceYesUSB, and more, including Bluetooth and Wifi in the future (this is a downside)Fairly recent product
LedgerProprietaryNoUSBVarious customer data leaks
Keep KeyOpen SourcenoUSBFake KeepKey App Phishing Attempts

 

Hardware Wallet and Cold Storage

A hardware wallet is a small device that is used to store cryptocurrency. People who use these wallets do so because of safety reasons. This is because many online wallets are usually not secure. In fact, online wallets are often very susceptible to hacks. Hardware wallets have four main benefits.

  • Computer viruses. Many scammers and criminals use viruses to get access to your online wallets. A hardware wallet is not susceptible to these hacks.
  • Safety. Hardware wallets are safer than online wallets. This is because the private key is stored in a protected area of a microcontroller. As such, they cannot be transferred out of the wallet in plaintext.
  • Security and interactively. Hardware wallets can be used in an interactive way and typically are the most secure form of wallet.
  • Open-source software. This is an important feature because it allows a user to validate operations on the device.

Hardware wallets are safer compared to online wallets. However, they can also be compromised in different ways, if someone gains physical access to them. Some of these ways are:

  • A malware can be put into the wallet. The malware can in return monitor crypto transactions.
  • The random number generator (RNG). The RNG may not be secure. This can lead to security issues. For example, an attacker can recreate the key’s RNG.
  • Implementation. The security of the device depends partly on how it is implemented. Implementation lapses can lead to vulnerabilities. Therefore, it’s recommended to only use devices that have open-source and verifiable firmware.
  • Shipping. A device can be compromised when it is being shipped.
  • Production. The device can be compromised during its production process.

What is a Cold Storage Wallet?

A cold storage is what most hardware wallets do: they store your private keys offline. Hardware wallets are special pieces of hardware that do not communicate your private key to the computer or your phone. In other words, they are used to store your cryptocurrency offline. A cold storage is relatively safe. If done right, and device you use cannot be tampered with, you can be pretty sure your private key is stored safely.

Cold storage is commonly used by cryptocurrencies exchanges but also by more serious Bitcoin holders. Storing your crypto in online wallets is very risky. As such, these companies and persons transfer most of their crypto in cold storage, which cannot be accessed by anyone who is online.

The process of sending crypto to a cold storage is relatively easy. First you need to get your hardware device and then follow their process. For example, if you have a Trezor, you can generate a new wallet address on the little device itself. You can send your Bitcoin off exchange or from any other wallet to your new address.

Another step you could take is to use a watch-only wallet. For this you need to get the master public key of the wallet and import it to your online computer. You can transfer any unsigned transactions to the offline computer to sign the transaction. Finally, you send the fully-signed transaction to the online computer and send it to the blockchain.

Cold Wallet Storage Methods

The other wallet you can use for bitcoin cold storage is a cold wallet. Cold wallets are not connected to the internet and they are a safe option to store your Bitcoin. They are also known as offline wallets. A cold wallet comes with software that the user can use to view their portfolio. This way, the user doesn’t have to put their private key at risk.

Hardware Crypto Wallet

There is also a hardware crypto wallet that is typically like a USB device. It stores private keys securely and is advantageous in that it is not affected by viruses and cannot be hacked. Crypto cold storage is the most secure way to store your digital currencies. However, it requires some knowledge to set up.

Sound Wallets

Sound wallet is not a common cryptocurrency cold wallet storage method. This method involves storing encrypted sound files in devices like bitcoin cold storage USB. There is a code that is hidden on the audio files and can be decoded using a spectroscope.

Paper Wallets

You can also store Crytocurrency offline through a Paper wallet. The paper can mean a real piece of paper. It can also mean a hardware that stores the keys, which are then printed. These paper wallets are not recommended anymore but used to be the classic way of storing your private keys.

This is a form of cold wallet that you can generate from some websites. It produces a public and a private key that you can print on paper. You can access your cryptos in this form of addresses only if you have this piece of paper. People laminate these papers and store these papers safely.

Do you need cold storage wallet crypto?

Many exchanges allow investors to buy cryptocurrency after signing up. The cryptos are held in the exchange wallet after purchase. Some people argue that exchanges like Coinbase are secure. However, if you have a large investment, it is advisable that you move your cryptos to a more secure cold storage crypto wallet.

So, when should you consider a cold storage wallet for cryptocurrency? If you have a significant number of cryptos and you are worried they could get stolen, you should consider crypto-cold wallets.

Risks of Cold Storage Wallet

If you hold Bitcoin, it is strongly advised to think of a good strategy to store the backup seed and to have a secure backup in a different location than the hardware wallet. This backup seed can be stored on a piece of paper, in a notebook, in fireproof envelopes or in a safety deposit. Many also use a form of steel backup tools.

This is because the biggest risk for cold storage is forgetting the master key or master seed. A good example of this is what happened when the CEO of a Canadian crypto exchange died. He was the only one who knew the master key. As a result, holders of the crypto lost currencies worth hundreds of millions of dollars.

Therefore we always need to write down the seed when we generate a new wallet. This is called the master seed. The master seed is often represented as 12, 18 or 24 words according to the BIP39 standard. Each of these words come from a 2048 word lookup table, and represents 11 bits (one or zero). From this, seed addresses can be derived, usually according to the BIP32 standard.

When creating a new Bitcoin wallet, in whatever way, it is also important to use enough entropy, or randomness. If you set up a basic wallet on your phone, the phone’s randomness generation is used. Some people have started resorting to using dice, or even casino dice, because these have better properties of randomness.

Also, while online wallets, mobile phone wallets or desktop wallets are usually free, hardware storage as a form of cold storage is not free. Trezor sells its wallets starting at EUR 50. At the same time, a hardware is a hardware. This means that it is not fire or water-resistant. It can also be lost. The same is true with a paper backup.

If you hold Bitcoin, it is strongly advised to think of a good strategy to store it and to have a secure backup on a different location than the hardware wallet.

Summary of Cold and Hardware Wallets

Cryptocurrencies have changed how people transact. They are, without a doubt, the future of finance. However, the biggest challenge for crypto is the high number of hacks. In 2019, criminals stole crypto worth more than $4.4 billion.

If you own bitcoin or other cryptos, we recommend that you store whatever you want to hold for the long term in a hardware wallet, using a paper trail backup in a safe place. In addition to this, you can create a mobile wallet to use your bitcoin on the go so that you can actually use crypto to spend on stuff or services.

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Crispus is a finance professional with more than a decade experience in the industry. Over the years, Crispus has written in-depth articles on leading platforms like CCN, Marketwatch, and Seeking Alpha. He also runs a Forex education and managed account company called WestEndFx.