Definition of cold wallet (2024)

FAQs

Definition of cold wallet? ›

A cold wallet is a crypto wallet that does not connect to the internet or interact with any smart contract. Since cold wallets don't connect to the internet, they are immune to online threats like malware or spyware. Plus, isolating these accounts from smart contracts also protects them from malicious approvals.

The main difference between hot wallets and cold wallets is that hot wallets can be connected to the internet through your computer or phone for convenient sending and receiving, while cold wallets are hardware storage devices that keep your data offline.

Of the different types, cold hardware wallets are the most secure option because they make your keys inaccessible until you need them. One of the leading names in cold hardware wallets is Ledger. The company maintains that its devices are completely safe and secure and have never been hacked.

Coinbase Wallet is a software, or hot, wallet, which means it stores the keys to your crypto assets using software on an internet-connected device.

A commercial non-custodial cold wallet is one of the safest methods for storing your keys. Considering you may be able to purchase one for about $200 to secure a token worth far more than that, they can be worth it.

Almost nothing is immune to being hacked, including cold wallets. While a cold wallet ostensibly cannot be hacked remotely, if your device is stolen, that's another story. For starters, if your PIN is stolen along with your cold wallet, someone could access your crypto.

A rule of thumb is that you should use a cold wallet when you have more crypto than you'd be comfortable losing. For small amounts of crypto, a cold wallet isn't necessary.

A cold wallet is perfect for protecting high-value crypto assets long-term primarily due to its security features: it keeps your keys offline and protects you from on-chain threats. Let's see how these features work.

Can cold wallets be traced? ›

Because cryptocurrency wallet addresses are publicly available, transactions can be traced to that address. If your name or other information is somehow associated publicly with your wallet address, transactions can be traced to you.

Is there a free cold Bitcoin wallet? The only “free” cold wallet device you can get is a piece of paper. Most hardware devices cost money and would typically set you back around $100.

Although all hardware wallets are cold wallets, not all cold wallets are hardware devices so if one looks for cold storage tips it's very important to fully understand how each wallet operates. Paper wallets and other offline methods of storing private keys are examples of cold wallets.

Coinbase has built its reputation as a trustworthy, reliable, and secure crypto exchange platform. It uses robust security measures to protect its users from losing their funds or data to hackers. To name a few, Coinbase stores more than 90% of its customers' funds in what's called cold storage.

Under certain circ*mstances, Coinbase does report to the IRS, but that does not mean the individual taxpayers is not responsible for reporting. Coinbase's reports to the IRS can include forms 1099-MISC for US traders earning over $600 from crypto rewards or staking in a given tax year.

Key Takeaways

A hot wallet's primary use is conducting transactions; it should not be used to store keys. A cold wallet offers more security benefits because it is not connected to the internet or another device.

Cold wallets Protect Your Assets From On-Chain Threats

Next, cold wallets protect your assets from malicious smart contract functions and apps. To explain, blockchain apps will require you to sign approvals to use their services. For example, let's say you want to sell an NFT on an NFT marketplace.

Are Cold Wallets Better? Cold wallets are better in that they provide the same functionality, access and ease of use as digital wallets. But they add an extra layer of security and protection that you can't get with a hot wallet that exists purely online in the digital space.