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What are the Types of Cryptocurrency Wallets?

Cryptocurrency security is a critical issue for anyone who invests in or trades crypto.


Investors first have to make an important choice regarding the wallets in which they keep their cryptocurrencies: Cold Wallet and Hot Wallet.


In this article we are going to discuss cold wallets and review its security and how it is being used by investors. 


Difference between Cold Wallet and Hot Wallet


If you want to buy cryptocurrencies and store them, you can store your crypto assets using a hot wallet, a cold wallet, or a combination of both. Hot wallets are connected to the Internet and are at risk to online attacks. But thanks to their connectivity, they work faster, making it easier to trade cryptocurrencies. Cold wallets, on the other hand, are not connected to the internet. Therefore, although they are seen as safer, they might be less useful for someone who transfers crypto frequently.


What is a Cold Wallet?


Cold Wallet refers to the name given to offline wallets that are used to store Bitcoin and other cryptocurrencies. Hardware wallets come in the form of physical electronic devices that use random number generators to generate public and private keys.


Cold wallets do not have an internet connection, so they are more resistant to cyber attacks, unauthorized access and security vulnerabilities. Only people who know the private key can access the funds in cold wallets. In this sense, the account holder can keep his funds safe as long as he does not share the secret keys given to him with third parties. Physical wallets become inaccessible even to the owner if the keycode is lost.


How to use a Cold Wallet?


If you want to keep your cryptocurrencies in a cold wallet due to security reasons, you can choose one of the paper or hardware wallet options.


Regarding paper wallets, you can take advantage of paper wallet creation tools that are created specifically for this job. It is recommended that the paper wallet creation process be done offline for cyber security reasons.


It is important for the security of crypto assets that the created paper wallet is kept safe and not shared with anyone.


Due to its flaws, the use of paper wallets is now considered dangerous and not recommended. However, if you still want to use it, it is essential that you understand the risks.


Technically, if you deposit your paper wallet private key into a desktop wallet and spend only a portion of the funds, the remaining coins will be sent to an “exchange address” automatically generated by the Bitcoin protocol. By checking this change address, you cannot set it manually, you risk losing your crypto assets.


Most software wallets today will handle the change for you and the remaining funds will be sent to an address that is a part of your wallet.


Hardware wallets, on the other hand, are a better electronic version of a paper wallet in terms of security and usability. They ensure that private keys are separated from the device. The keys are kept in a special place of the device and the key is not allowed to be removed.


Since hardware wallets are offline, they must be used with another device. Thanks to their high security structure, hardware wallets do not get viruses from computers and smartphones, and they do not leak their private keys. Users use their hardware wallets by connecting them to a device, interacting with software where they can view their balances and make transactions.

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