Decentralization is blockchain technology’s main feature. It allows users to transfer money without intermediaries and to personally store and own assets. Many users who don’t want to deal with exchanges or 3rd-party wallets store their crypto in a cold storage wallet.
Cold storage wallets are what whales, exchanges, and other investors use to keep their funds in a safe place. In this article, I’m going to explain how they work, how to use cold storage, and what makes them different from hot wallets.
Crypto cold storage is the safest method for storing cryptocurrencies because it is offline and remains unconnected to the internet – unless when used. By being offline, these wallets have no exposure to malicious actors such as hackers or viruses. The wallet only connects to the internet when you need to transfer digital assets.
A cold storage wallet (or hardware wallet) comes in the form of a small and portable physical device that stores cryptocurrency on a blockchain network. You can keep it in your home or carry it around with you. But no matter where your wallet is, you can’t transfer assets without physical access to the wallet.
Crypto investors prefer cold storage because 3rd-party solutions come with unnecessary security risks. If a hacker compromises your exchange account, you’ll lose money without having the ability to recover your coins. And hackers are no imaginary boogeymen. In 2021 alone, hackers stole $14 billion worth of crypto funds. Trust me, you don’t want to be a statistic.
With the help of Decentralized Finance (DeFi) and its prominence, crypto investors interact with more platforms than ever. Investors now lend money, yield farm, stake NFTs, and execute trades on a daily basis. But some decentralized applications do not support hardware wallets, and users are forced to give up safety in exchange for profit.
I’ve interacted with hundreds of dApps with my MetaMask (hot) wallet, and each one is on my list of approved platforms. Every time I pull the trigger and accept a transaction, I worry: is the smart contract or my wallet exploited? Someone could approve a transaction on my wallet and I wouldn’t even know it. This is a serious concern for me, and millions of crypto investors.
But after connecting my MetaMask to a cold storage wallet, I no longer have that worry. The private keys are stored offline and no one but me can issue transactions.
A hot storage wallet (or software wallet) is a digital custody solution for crypto investors. These wallets are always connected to the Internet and have their private keys stored on your computer. Popular hot wallets include MetaMask, Exodus, and Phantom.
A hot wallet has its benefits. First and foremost, they’re user-friendly. Moreover, these wallets are not clunky. You’re always a second away from confirming a transaction, no matter where you are. But the problem with hot wallets is that they are highly susceptible to security risks. You can download the wrong file or interact with the wrong dApp and voilà – your funds are gone.
The main difference between hot and cold storage wallets is that one’s private key is online and the other’s is offline. The private key from your MetaMask wallet is stored in your browser extension. If someone gains control of your computer or browser, they gain access to your funds. But a hardware wallet’s private key is stored offline. No one can access it without having your wallet in their hands.
I recommend cold storage wallets to experienced users who have too much money to risk unnecessary liabilities. Storing anything above $10,000 in a software wallet is a major nuisance. You should follow a 90/10 or 80/10 ratio when deciding where and how much crypto to store.
I also recommend cold storage wallets to inexperienced, yet brave users. If you really want to be a crypto OG right from the get go, you can’t store your wealth inside a software wallet. You should buy a Trezor or Ledger and learn how to store and manage your wealth in a decentralized way – the right way.
Hardware wallets might seem more complicated than their counterparts. However, the truth is that they’re no more complicated than setting up an exchange account or trading futures markets for the first time. And to be honest, I’d rather learn how hardware wallets work with $1,000 than with $100,000.
To store crypto in cold storage, you’ll need a hardware wallet first. Trezor and Ledger produce the most popular hardware wallets – I’ll talk more about their models later. The following section features a tutorial on setting up and transferring Bitcoin to a Trezor hardware wallet.
You want to check whether the box of your Trezor Wallet has a security seal once it arrives. If the seal has been broken, contact Trezor’s support team because the product might have been resold or chipped by a malicious actor. If the seal is okay, open the box and find the following items:
After checking that you have everything, use the USB cable to connect the hardware wallet to your computer or laptop. While connected, head over to trezor.io/start and follow the setup process.
Trezor’s official website will ask you to set up a new wallet on their platform and to back up your seed phrases. You do so by writing down the words produced on the Trezor platform into your seed phrase card. Next, you have to set up a PIN lock after creating a backup. The last steps require you to name your wallet and bookmark the website.
Note that the website might also require you to install a firmware update. Check that the firmware ID displayed on your wallet’s screen is the same as on the Trezor platform and install the update. You’ll have to reconnect the device after the firmware update succeeds.
You need to connect your Trezor with your computer to transfer cryptocurrency. Use the same USB cable and visit Trezor’s website again. On the platform, find the balances tab and search for the cryptocurrency you wish to transfer. You can search Bitcoin and copy your deposit address.
Next, head over to your favorite exchange and log into your account. Under the wallet tab, click spot and fiat. Then look for Bitcoin and click the withdraw button. Input the amount you wish to transfer and select the Bitcoin network. Now input the deposit address copied from Trezor and paste it into the corresponding field.
Binance will ask you to type in a PIN number sent to your email and your 2FA security code. After typing both, confirm the withdrawal and wait. You should find the Bitcoin in your Trezor wallet after 10 to 30 minutes. You can now unplug the hardware wallet and store it safely until your next transaction.
The same procedure applies to any hardware wallet. Only the interface and setup process differ from wallet to wallet, but the transfer method remains the same.
Another difference between hot and cold wallets I haven’t mentioned is that you don’t have to worry about which hardware wallet you choose. You really only need to choose between two of the best cold storage crypto wallets: Trezor and Ledger.
The fact that both Trezor and Ledger are extremely good products can soothe your worries. You won’t make a mistake, whichever you choose. But let’s dive into their flagship models to uncover their differences.
The Trezor Model T is a reliable hardware wallet that comes with a touchscreen display and durable, yet lightweight form. The Model T allows you to not only store cryptocurrencies, but to trade them as well. You can exchange assets via 3rd-party platforms such as CoinSwitch and Changelly directly through Trezor’s online platform, making it one of the best crypto hardware wallets.
The touch screen makes the Model T easy to use. The previous models had two physical buttons which were unpopular among users. Another neat feature is the MicroSD card port, which you can use for encrypting your PIN.
The best feature in Trezor’s hardware wallets is the online platform. The platform is intuitive and is easy to use as the wallet itself. It allows you to manage assets, exchange assets, and manage your security. You can even generate QR codes so that other people can view your address and transfer money.
Last but not least, I have to commend Trezor’s commitment to guiding users through their first hardware wallet. You’ll find dozens of guides and instruction manuals on Trezor’s website, along with tips and tricks.
The Ledger Nano X is a cold storage wallet the size of a USB flash drive. It supports thousands of cryptocurrencies and numerous popular networks which you can interact with via the Ledger Live platform. You can establish a wired connection with your PC to manage assets, but you can also use bluetooth to connect the Nano X to your smartphone. Although the bluetooth function comes in handy, some users criticize it due to creating an unnecessary attack vector. However, users have yet to report a single security issue with the bluetooth feature so far.
Another great thing about the Nano X is that it facilitates staking. It can connect with DeFi and NFT dApps. However, the number of apps which you can connect to is limited. The upside is that Ledger’s flagship model is one of the cheapest hardware wallets.
If you want to both store your crypto in a hardware wallet and periodically rebalance assets, you’re in luck. Shrimpy allows users to connect their cold storage wallet and manage or rebalance your portfolio while your assets stay safe and offline.
If you want to learn more about cold storage wallets, hot wallets, and storing cryptocurrencies, I recommend reading the following articles:
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