Despite those photos of shiny gold “Bitcoins” that illustrate so many articles about cryptocurrencies, physical coins aren’t typically used in today’s digital money world. Instead, cryptocurrency investors usually store their holdings in either a hot or cold wallet.
Hot wallets – which store digital tokens online – include the storage services offered by cryptocurrency exchanges, as well as a variety of software applications. Cold storage, on the other hand, preserves cryptocurrency private keys in an offline environment using anything from a hardware device to a simple piece of paper.
One big benefit that cold wallets offer over hot wallets is security: by taking private key storage offline, cold wallets are virtually unhackable. The downside of cold wallets, on the other hand, is that they can be misplaced, lost, stolen or physically destroyed. And if you lose your private key, you’ve likely lost your digital funds for good.
When deciding between a hot or cold wallet, think first about how you intend to use your cryptocurrency. Will you be actively trading on a regular basis? Or do you plan to simply hold onto your funds as a long-term investment?
“Hot wallets are like checking accounts whereas cold wallets are like savings accounts,” notes the Blockchain Council’s guide to hot versus cold wallets. “As the name suggests, hot wallets are used for the everyday spending of cryptocurrencies and typically only hold small amounts of any token, very similar to real wallets that people keep with them on a day-to-day basis. Cold wallets, on the other hand, are used for long-term secure storage of cryptocurrencies and typically [hold] large amounts of money that are not intended to be touched very frequently.”
If you’ve decided to opt for a cold wallet, you’ll find a variety of options. The simplest one – a paper wallet – can be generated using a browser-based service (the keys aren’t transmitted online) and then printed using an offline printer. Typically, such a wallet includes the public and private keys in both numeric and QR form. If you take this route, it’s vital to keep this paper in a safe place and remember where that place is.
Given the other disadvantages of paper wallets, you might choose to use a seed phrase instead of printing key information directly. This involves using wallet software to generate a string of words, rather than the actual private key, for crypto backup and recovery. Like the key string itself, though, a printed seed phrase needs to be carefully stored to prevent it from being lost, stolen or damaged.
There’s also the option of using hardware-based cold storage. This alternative includes devices like Ledger’s Nano S (a Nano X will also be arriving on the market soon) and Trezor’s One or Model T. Resembling keychain fobs, these devices feature a small display for verifying actions and help secure private keys though the use of PINs.
In a recent head-to-head comparison between Ledger and Trezor, Blockonomi noted that Ledger’s stainless steel devices appear sturdier than Trezor’s devices, which are made of plastic. Both devices work with MacOS, Windows and Linux; the Trezor also supports Android, while the Ledger also works with Chrome OS. Both devices support a variety of cryptocurrencies besides Bitcoin.
While these hardware options are costlier than paper – in the range of £50 and up – they offer advantages for backup and recovery. For example, PIN protection and recovery seed phrases enable users to restore access to their accounts even if their device is lost or stolen.