Cold cryptocurrency wallets, as opposed to hot wallets, which are connected to the Internet and can theoretically be accessible to malicious third parties, deal with storing private keys offline to radically minimize chances of an attack.
How does it work?
Cold wallets are traditionally thought to be more secure as they not only reduce the chances of hacker attacks but also provide additional security like fingerprint analysis. With exponentially increasing concerns about the growing number of attacks on cryptocurrency assets, cold storage is gaining popularity with those who hold substantial funds.
In order of ascending safety levels:
Paper wallets are essentially objects made of paper, plastic, metal, and so on, on which private and public keys are recorded. They provide reasonable levels of security for a variety of reasons, one of them being that these objects can be split into several parts and stored in different places or have letters added or subtracted to the keys.
USB drives are convenient for storing data essential to accessing your Bitcoins. USB drives cannot be split into parts, but they can be encrypted.
In terms of reliability, the best strategy is buying from established and trusted retailers. Trezor with its recovery seeds, PIN, and encryption passphrase options is one of the most popular cold wallets out there. Trezor features open-source software that can be verified independently and added security like increasing waiting times after erroneously entered PIN.
Another widely used supplier is Ledger with its high-level firmware implemented by one of the veterans of the cryptocurrency industry, OLED interface, screen lock, 24 seed words, frequent updates and optimizations, and an option of installing up to 18 apps. Reputable manufacturers are considered a must for owners of large volumes of funds.
A hardware wallet is connected to your PC when you need to make a transaction and every time you take an action you input sensitive data or press a button.
It is considered a good practice to avoid keeping substantial amounts of funds in exchanges, as these may be unregulated (unreliable), hacked, vulnerable to wrongdoing on the part of the staff, or become arrested or bankrupt. Software wallets allow concentrating funds at user’s disposal, but they are still vulnerable to outside influence.
Hardware wallets can be a tremendously helpful tool when it comes to reducing risks provided all or most conceivable points of failure have been addressed. This may include deep cold storage or buying from a reputable manufacturer (like Ledger and Trezor), avoiding using delivery when buying them, and so on.
According to some sources, there have been no cases of virus interference with hardware wallets so far (food for thought), which leads us to believe they are well-suited for keeping cryptocurrency secure.
Deep cold storage
Cold storage means storing your funds offline, but still using a system connected to the Internet for various purposes. That that leaves the user with a risk, however small. Deep cold storage involves using systems that did not and will not connect to the Internet.
Xapo’s cold storage with satellite protection, 3-of-5 multisignature transaction standards and Service Organizational Control 2 (SOC2) financial audits by Burr, Pilger & Mayer LLP involves armed guards, undisclosed locations underground, and video surveillance and is thought to be the most effective means of cold storage available today.