Unfortunately, you can’t hide your Bitcoin under the mattress. You can’t store it in a deposit box or have a bank keep it safe for you either. But what you can do instead is store cryptocurrencies in a portable and physical device called a cold wallet.
The main misconception is that cold wallets come with a catch: their storing capabilities are much safer, but make them impractical for day-to-day use. You can’t directly interact with exchanges and DeFi apps with a cold wallet without transferring the funds to a hot wallet. And for anyone like me who needs to sign transactions every day, cold wallets sound like a cumbersome solution – except that they’re not.
In this article, you will learn more about cold wallets and how they work. I will also guide you through connecting cold wallets with various crypto trading bots, dApps, and other 3rd-party services that let you leverage your digital assets.
What Is a Cold Wallet?
A cold wallet is an offline blockchain wallet that stores cryptocurrencies such as Bitcoin and Ethereum. These wallets come in the form of a small USB thumbstick-like device that you can carry around or hide somewhere in your home. They help you store and transfer crypto like with any other wallet, but the difference is that they’re far safer compared to conventional wallets.
Their safety stems from the fact that they’re offline. The wallets have no internet connection and provide hackers and scammers with no attack vector. The only time a cold wallet goes online is when you connect it to your local computer to access and move funds. And even then, their encryption combined with locally-stored private keys make them impossible to penetrate.
The two most popular examples of cold wallets are the Ledger Nano X and Trezor Model T. You set up the two wallets like any other hot wallet: set up a password, save your seed phrases, and you’re good to go. The difference is that you must connect your wallet to your computer whenever you want to transact assets.
Are Cold Wallets Better than Hot Wallets?
Investors often store their assets on an exchange when they join the crypto market. This custodial solution makes it easy to exchange assets on a moment’s notice. However, exchanges are prone to suffering from hacking attempts and liquidity issues – making them a terrible crypto-storing venue.
If exchanges do not offer the security you need, the next solution is a non-custodial wallet. A non-custodial wallet is any type of wallet whose assets you personally control. I categorize non-custodial wallets as hot wallets and cold wallets.
Example of cold wallets:
Examples of hot wallets:
Hot wallets are software wallets installed on your computer as an app or a browser extension. They store your private key locally on your device. Some hot wallets are also available on mobile devices.
Hot wallets offer more user-friendly features compared to cold wallets. They are also easier to set up and install. Moreover, their design makes interacting with Web3 and DeFi platforms much more convenient. But in turn for convenience you sacrifice security.
Cold wallets are better than hot wallets due to their security features. Connecting your Trezor to a PC everytime you wish to transfer assets might sound cumbersome, but it isn't so bad knowing you’re protecting your capital. The extra five minutes you save using a hot wallet isn’t worth losing $100,000 in crypto because a hacker injected a Trojan into your computer.
How Does Cold Storage Work?
Like I mentioned previously, cold storage wallets store the private keys needed to sign a transaction offline. The private keys are stored on the device itself. No one can access your private keys without having physical access to your wallet. And any time you want to transact, you need to plug the wallet into a computer in order to access the private keys.
If you have a Trezor wallet, the process might go like this:
Insert a cable into the wallet and connect it with your computer
Open the Trezor Suite desktop app
Log into the wallet
Insert deposit address or request asset exchange
Confirm order and sign transaction
While interacting with Trezor Suite, the desktop interface for using your wallet, your private key never comes in touch with an online server. Hackers cannot intercept the transaction or perform any other actions. All they can do is view it on a blockchain explorer like everyone else. The information remains private and offline, safe from harm’s way.
Understanding the security needs of its users, Shrimpy has incorporated cold storage into its automated portfolio management platform. Investors can create cold wallets on Shrimpy and keep a portion of their assets offline, while storing the rest on exchanges.
Shrimpy’s main automated investing strategy is portfolio rebalancing. Portfolio rebalancing is a process in which the investor sets allocations for each asset in his portfolio. The portfolio will be rebalanced on a time-based period, or whenever the assets drastically drift away from their initial allocations. This is done to ensure proper risk management by controlling exposure to different assets and selling or buying assets.
You can think of rebalancing as buying low and selling high. You move your capital to assets that haven’t moved in value and siphon profits from assets that grew too large in a short time-span. Portfolio rebalancing is a more efficient investment strategy compared to simply HODL-ing.
Whenever Shrimpy performs an automated rebalancing, it only trades the difference between your target allocation and current allocation. This is a small amount compared to your total capital, meaning that Shrimpy doesn’t need much on-hand access to rebalance your portfolio.
What’s great about this system is that Shrimpy can store a portion of your portfolio offline for security purposes. The remaining, online portion, will be dedicated to performing rebalancing. However, Shrimpy will keep your total portfolio value in mind when calculating and processing rebalancing. Doing so makes it easy to simultaneously favor liquidity, ease of use, and security while using the platform.
How to Create Cold Storage Wallets at Shrimpy
Adding cryptocurrencies to cold storage on Shrimpy is incredibly easy. All it takes is a few steps and you can easily remove your funds from cold storage if you change your mind.
The first step is to select the portfolio you want to use and select the asset you wish to move to cold storage. You can do so by visiting the dashboard and selecting the asset you wish to move from your portfolio. You will move to the asset details page by clicking the crypto asset of your choice.
Right under the trading interface you’ll find a cold storage button. Click it and a new window will pop up that looks like the image below.
Here you can name your cold storage and insert the amount that you wish to move to cold storage. Once you click save, Shrimpy will move the assets and store them offline for your safety. To remove the assets from cold storage, simply click the edit cold storage button and click on the bin icon as shown below.
For handling assets held on hot wallets, you should head to the settings tab and click the ‘Link Wallet’ button. Here you should select the wallet you own, add your public address, and save the wallet. This will allow you to perform transactions and trade assets held on software wallets such as Metamask, rather than exchanges.
That’s everything you need to know about handling cold and hot wallets on Shrimpy. If you want to learn more about blockchain wallets, I recommend reading the following articles:
Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.
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