What is a cold wallet? How does a cold wallet work?

Since the appearance of the blockchain, the world of cryptocurrencies has grown, especially in recent years. In other words, the use of virtual currencies has increased and that implies maintaining their security. Therefore, each user will decide the best way to store them and thus access their cryptocurrencies whenever they want. In this sense, cold wallets are an excellent option for this purpose of trust. Let’s see what cold wallets are and how they work.

What are cold wallets and how do they work?

Talking about security means talking about cold wallets. Based on this, it is defined as “cold” because it is a physical device or hardware that acts as a cryptographic wallet.

One of its key components is that cold wallets are not connected to the Internet. This feature makes cryptocurrencies more secure and difficult to hack. That is, the cryptographic keys are stored offline.

They work by receiving data from a transaction, which is transmitted with the digitally signed key. These signed transactions are sent through any device with Internet access.

The most important features of cold wallets

They are generally favored by security-conscious crypto users or those with a large number of assets to protect. This preference certifies the level of security that this wallet offers to those who want to handle custody themselves.

In fact, cryptographic best practices advise that you should never store large amounts of cryptocurrency in an online “active” wallet due to security concerns.

  • Cold wallets store keys offline to minimize the risk of hacking. Your inability to access the Internet minimizes the risks.
  • The most frequent method of storage is through a wallet contained in a device.
  • Private keys are stored on a password-protected physical device. Therefore, no one can access those keys unless they own the device and guess the passcode.
  • Cold wallets can be stored on devices such as USB, CD, or computers, offline, where it is digitally signed prior to shipment.

Benefits and disadvantages of cold wallets

Among the most notable advantages of this type of cryptocurrency storage are:

  • As a user you can keep your keys private and offline for added security.
  • You have full control of your keys.
  • In the market you will find various reliable manufacturers with different prices and features.

Around some disadvantages, we can point out:

  • They can be lost, stolen or destroyed.
  • You must maintain discipline and be responsible for the self-custody of your crypto assets.

How they differ from other virtual wallets

According to Jalabera, there are several ways to store cryptocurrencies, so, as a user, you should assess your investment objectives, as well as security. In this sense, as mentioned in previous paragraphs, the basic difference is that it can work without the Internet. This trait provides reliability to users.

Another difference to note is that cold wallets generally have a cost that varies between $50 and $150. Instead, the so-called “hot wallets” are mostly free. However, would you sacrifice the security of your assets for free?